Millions of self-employed 'face poverty in old age'


Millions of self-employed people risk heading for old age poverty unless stronger action is taken to help Britain's "forgotten army" of workers, a report by former pensions minister Steve Webb warns.

The report raises fears for Britain's 4.4 million-strong army of self-employed people, who account for around one in seven members of the working population.

Pension saving for among this sector is now at "crisis levels", said Mr Webb, who is now director of policy at Royal London, which published the report.

Self-employed people are generally not included in the drive to get people saving into a workplace pension under automatic enrolment.

But Mr Webb argues the National Insurance system could be used to mirror the process of auto-enrolment and "nudge" more self-employed people into pension saving.

Automatic enrolment into workplace pensions started in 2012 to help head off fears of an old age savings crisis and so far more than six million people have been placed into a pension. The scheme has been seen as a success in getting people into the savings habit, with around nine in 10 people staying in their workplace pension.

Mr Webb 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. It is time for action."

Mr Webb continued: "Without action, millions of self-employed people could face poverty in old age."

The report, titled Britain's Forgotten Army, said that while some self-employed people may benefit from recent changes to the state pension, action is needed to tackle the "large and growing problem" of declining private pension provision among the self-employed.

The report pointed to government estimates showing that in the mid-1990s nearly two-thirds (62%) of self-employed men were members of a pension scheme, but by 2012 this proportion had fallen to less than one quarter (22%).

Mr Webb also highlighted Office for National Statistics (ONS) figures showing the numbers of self-employed people have been growing between 2008 and 2013 across the whole of Britain.

The report argues that while it may be thought "politically unfeasible" to force self-employed people to save for a private pension, self-employed people could be given a strong nudge in that direction, building on the lessons from auto-enrolment.

It recommends that the special category of National Insurance Contributions (NICs) paid by self-employed people on their profits - Class 4 NICs - should be charged at a higher rate of 12% rather than the current 9%.

Instead of the additional contribution being kept by government, self-employed people would be able to opt to have that money diverted to a pension or one of the new Lifetime Isas set to launch next year, provided that they made their own direct contribution of at least 5%. The combined contribution of 8% would match minimum contributions under the planned rollout of automatic enrolment.

While 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% of NICs that they had paid in, under the proposal.

The suggestion would work in a similar way to that in which employees would only be able to get a 3% employer contribution to their pension pot if they remained enrolled in a workplace pension. If they opted out, the employer contribution would stop.

The report estimates 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 were similar to those for automatic enrolment currently.

Mike Cherry, national chairman of the Federation of Small Businesses (FSB) said the report makes a "valuable contribution", adding: "This is a subject which needs much greater thought and attention."

Huw Evans, director of the Association of British Insurers (ABI), also welcomed the report, saying: "This is an important report into an area of public policy that has received little attention in recent years; how to encourage self-employed people into greater saving for retirement.

"I hope Royal London's proposals kick-start the debate that is needed so the decline in retirement saving from the self-employed can be tackled effectively."

A Department for Work and Pensions (DWP) spokesman said: "As part of the Government's commitment to encourage people to save for later life, we have incentivised those who are self-employed with tax relief on their pension contributions.

"They will also benefit from the new state pension, with around three-quarters of those who reach state pension age in the next 15 years receiving a higher amount than they would have done under the previous system."