Why the self-employed are at high risk of pension poverty


04 Jul, 2018

Why the self-employed are at high risk of pension poverty

A recent report has shown that there is a substantial lack of pension savings amongst the self-employed, ranging from shop owners to electricians to accountants.

New concerns have risen amidst self-employed workers who fear a lack of savings for future life. These concerns have gouged a hole in the state pensions wall, as it has progressed into a serious issue not only for the self-employed, but for the government too.

A recent article published on The Independent, shows how this matter could trigger a serious decline in UK pensions, increase the risk of poverty amongst retirees and cause a dip in the pensioner’s standard of living.

Self-employed jobs have increased by 20% over the last eighteen years; a significant growth which has led to a culmination of almost 5 million freelance workers. The Association for the Independent Professionals and Self-Employed (IPSE), have concluded that there is a significantly large pay-gap between the pension savings of an employed wage-earner, versus that of a self-employed worker.

The latter reserve less than one third of their savings towards their pension. On the other hand, those employed are looking at a very different future, primarily because of the automatic enrolment pension scheme, which sanctions UK employers to make significant contributions to their employees’ income every pay period.

The IPSE warns that, saving for the future could prove to be a far more pressing concern than it already is, if not addressed promptly. This foundation aims to work alongside the government to provide pension support to the self-employed.

Senior policy adviser for the IPSE Jonathan Lima-Matthews, has declared that “an increase in pension poverty and a downward shift in living standards” may be in the works if most self-employed workers of the current generation will rely solely on state pensions for later-life support, as opposed to an alternative additional income source.

State pensions have already taken a beating in recent years, and a pending crisis in the self-employees’ pensions could only exacerbate the situation. The individuals most susceptible to poor retirement living standards are those who are new to the self-employment world, women and the younger generation.

The IPSE has accredited this crisis to the fact that there is minimal awareness surrounding future financial planning. Moreover, a more critical issue is the fact that as of yet, there exists no auto-enrolment pensions scheme for the independent professionals.

The report issued by the IPSE has suggested that one of the solutions to this ever-expanding problem would be to introduce a “sidecar pension” for the self-employed, through which income would be transferred and utilised as a reserve fund.

However, this approach has been criticised as not all self-employed individuals maintain enough stability to put aside a money supply of their own. Therefore, government interference has been strongly advised.

Head of Pensions at Aegon, Kate Smith, has argued in favour of an auto-enrolment scheme for the self-employed, claiming that it could be a plausible solution. Furthermore, a digital tax incentive has also been proposed, whereby paying tax on a more frequent basis could invite people to dedicate more attention to their later-life savings.