PENSION coverage among the self-employed has reached crisis levels, and there is a real risk that millions of self-employed people are heading for poverty in retirement unless action is taken, a report by insurer Royal London has warned.
It recommends that National Insurance Contributions (NICs) payable by self-employed people should be increased to “nudge” them into saving more for their retirement. Pension scheme membership among employees has risen by more than five million in the last four years because of the broadly popular policy of automatic enrolment into workplace pensions.
But Britain’s “army” of 4.6 million self-employed people are not covered by the policy. Estimates by the Department for Work and Pensions suggest that in the mid-1990s 62 per cent of self-employed men of working age were saving into a pension, but by 2012 that proportion had fallen to just 22 per cent. The report – Britain’s “Forgotten Army”: The collapse in pension membership among the self-employed – and what can be done about it – offers a practical solution to that problem. It recommends that the special category of NICs paid by self-employed people on their profits – Class 4 NICs – should be charged at a rate of 12 per cent rather than the current 9 per cent.
But, instead of the additional contribution being retained by the Government, self-employed people would be able to opt to have that money diverted to a pension or Lifetime ISA, provided that they made their own direct contribution of at least 5 per cent. The combined contribution of 8 per cent, would match the statutory minimum under automatic enrolment. Whilst self-employed people would not be forced to take out a pension, this would be the only way they could benefit from the additional 3 per cent of NICs that they had paid in. This is similar to the way in which employed earners can only get a 3 per cent employer contribution if they stay enrolled in a workplace pension. If they opt out, the employer contribution stops. It is estimated that around three million self-employed people would be covered by the new scheme and it could increase the number of self-employed pension savers by well over two million if opt-out rates are similar for this scheme as they currently are for automatic enrolment.
Steve Webb, director of policy at Royal London, said: “Self-employed people are missing out on the surge in pension scheme coverage among employed earners. Indeed, whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels. Using the existing National Insurance system to mirror the process of automatic enrolment is the best way of giving self-employed people a ‘nudge’ to start saving for a pension. In addition, because self-employed NICs are linked to profits, contributions would automatically go up in good years and down in poor years. Without action, millions of self-employed people could face poverty in old age”.
The reasons why self-employed people often find it hard to set aside money for retirement vary, but for many it all boils down to the irregularity of their income.
James Gribben, spokesman for the Association of Independent Professionals and the Self-Employed said: “It’s often a feast-or-famine scenario for self-employed people; there can be good times, but then there can be other times when they don’t have any contract.