The Institute for Fiscal Studies (IFS) has issued a stark warning about the impending pension crisis facing nearly 2 million self-employed workers in the United Kingdom. According to their recent report, a mere 500,000 self-employed individuals earning over £10,000 annually are actively contributing to a pension scheme, leaving 1.8 million without adequate retirement savings.
This alarming trend represents a significant decline in savings rates over the past quarter-century. In 1998, approximately two-thirds of self-employed workers were saving into a pension, a stark contrast to the current situation. The majority of those who work for themselves have never contributed to a pension plan.
The consequences of this savings shortfall are severe. The IFS report, conducted in collaboration with the Abrdn Financial Fairness Trust, reveals that three-quarters of self-employed individuals can anticipate retiring on an income below £15,000 per year, including their state pension. Even more concerning, at current savings rates, 55% of the self-employed workforce is projected to have no private pension provision whatsoever upon retirement.
To address this looming crisis, the IFS suggests that younger self-employed individuals aged 25-34 should aim to save 9% of their income annually, while those in their 50s would need to set aside 18% to achieve a suitable retirement income.
David Sturrock, an economist at the IFS, proposes two potential policy solutions:
- Prompting self-employed workers to invest in a pension or Lifetime ISA as part of their annual tax return process.
- Automatically enrolling them into a long-term savings plan, with an option to opt-out.
Sturrock emphasizes that either approach would reduce the barriers self-employed individuals face when considering retirement savings.
The success of auto-enrollment for private sector employees since 2012 has been remarkable, with pension participation rates soaring from just over 40% to more than 85%. However, this scheme does not extend to the self-employed workforce.
Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, stresses the urgency of governmental action, stating:
"The self-employed make up an increasing share of the UK's workforce but far too many are on track to have a poor retirement. More than half have no private pensions savings."
The report also suggests encouraging self-employed individuals to increase their pension contributions over time to combat inflation. One proposed solution is to modify the default settings for direct debit contributions, potentially implementing automatic annual increases in line with the Consumer Price Index.
It's worth noting that the UK's pension system currently ranks 9th globally in the Mercer CFA Institute Global Pension Index 2023, highlighting the need for continued improvement and adaptation to changing workforce dynamics. Self-employed workers have access to various pension options, including Self-Invested Personal Pensions (SIPPs) and stakeholder pensions, which offer flexibility and tax advantages.
As the self-employed workforce in the UK continues to grow, reaching 4.2 million in 2023, addressing this pension crisis becomes increasingly critical. The government's response to these recommendations will be crucial in shaping the financial future of millions of self-employed workers across the nation.