The employed workforce in the UK have been hugely helped by Auto-Enrolment. This was introduced in 2012 and has automatically opted 10million more staff into company pensions since it was introduced. The minimum is 8% of salary going into a pension for the majority of the employed workforce.
The company pays 4%, the employee 3% and HMRC 1% in tax relief. This isn’t enough but it is a fantastic start.
Since Auto-Enrolment was designed, retirements have grown longer, and wages have stayed lower than expected. The 8% is now out of date and the PLSA research suggests that it should be more like 12%. Employees support this increase and believe the employer should increase their contribution. Employers support this increase and believe the employees should increase their contribution.
Defaults work very well on Humans and apathy in this case has been a hugely powerful force for good.
Unfortunately for the self-employed they don’t have the equivalent ‘nudge’.
About 1 in 7 workers, 4million people, are self-employed.
Of all self-employed people in the late 1990s, 60% were saving into a pension, unfortunately by 2015 this was down to 20%. Also there are more self-employed people now than in the 1990s.
This creates a three tier future pensioners. Those with Final Salary pensions (typically state employees in the future), employees with Defined Contribution workplace pensions and the self-employed.
How could we address this using the same behavioural nudges that employees benefit from?
The simplest solution is for the government to set-up a UK wide pension fund for the self-employed. Contributions could be managed though the self-assessment tax return that the self-employed have to submit. This could be an opt-in but an opt-out system would be more powerful. This is a option highlighted by the Institute of Fiscal Studies IFS.
The tax return contains enough data for the pension contribution to be calculated.
HMRC managed this before when Child Trust Fund vouchers were not claimed by parents and they therefore defaulted the money into their choice of CTF for the child.
It is likely that there would be serious pushback to this kind of proposal from the self-employed. If you don’t want the interference of an employer, you probably also do not want the interference of government. However what is the government for if not for protecting the public from slow but devasting economic risks? The young, self-employed, part-time employed and Gig workers are the most vulnerable members of society when it comes to future pensioner poverty.
There is lots that could be done to reform pensions, and we have spoken about these in the past in this blog. The most impactful change though, would be to pull all of these vulnerable people into the pension system.
If you are self-employed and want to talk to us about starting a pension, contact our office in Hook, Hampshire.