It is clear auto-enrolment has been a resounding success with millions more employees building retirement benefits.
But the position for the self-employed is fundamentally different: retirement saving has collapsed over the last 20 years.
Analysis by the Institute for Fiscal Studies highlights the extent of the problem. In 1998, 48 per cent of the self-employed contributed to a private pension, but this fell massively to just 16 per cent by 2018.
This decline in pension saving has taken place alongside the growth in self-employment – from 3.4 million in 1998 to 4.8 million in 2017. But the decline in saving does not just affect the newer and lower earning self-employed. As the graph below shows, pension saving among the higher earning self-employed has fallen even more dramatically. And this also holds true for those who have been self-employed a long time.
It is difficult to understand the reasons for the lack of saving among the self-employed. Attitudes to pensions do not appear to have changed in a way to explain the massive decline, with affordability remaining the main reason for not saving.
The IFS research also shows the lack of pension savings does not seem to be compensated by growing savings elsewhere. It points out the proportion of self-employed saving through Isas, shares or savings accounts has decreased too. The decline cannot be explained by the trends in average housing wealth either as it is similar for both employees and the self-employed.
This lack of savings is likely to mean many self-employed people will have to work later in life and when they retire, they will rely primarily on state pensions. These are unlikely to provide the retirement income they desire.
The current Covid-19 situation is likely to put more pressure on the finances of the self-employed as demand for work may fall and government support is not as generous compared to employees. Putting in place some form of auto-enrolment may be one way to help as the lack of an employer contribution makes saving harder.
Giving the self-employed greater incentives to save in a pension or allowing them to access their funds in certain circumstances to help their business are worth considering. This area of pension policy needs greater attention.
Andrew Tully is technical director at Canada Life
