In theory, the self-employed should have been the beneficiaries of the government’s new Lifetime ISA but, according to Hargreaves Lansdown head of retirement policy Tom McPhail, the Lifetime ISA would miss much of its target market because they will not be eligible for it.
From next April, LISA will be available for 18 to 40 year-olds who will receive a 25% government bonus on up to £4000 of their savings each year.
According to McPhail (pictured), in 2013/14, out of a self-employed population of 4.2 million, about two-thirds would have been ineligible for a LISA because they were already over the age of 40.
McPhail said retirement provision among the self-employed had “collapsed” in recent years. Last year (2014/15) self-employed pension contributions had fallen to £1.22bn, their lowest level since 2001, he said. This meant a mere 380,000 self-employed people out of a total 4.6 million made a pension contribution.
McPhail said: “The self-employed are a rapidly growing segment of the economy, yet savings policy has completely left them behind. Most of them aren’t saving in pensions and most of them aren’t eligible for the forthcoming Lifetime ISA. The government can’t ignore this developing crisis any longer.”
Here are three ways, he thinks, the crisis can be fixed:
1) Extending auto-enrolment to the self-employed
By definition, the self-employed can’t be auto-enrolled into a workplace pension. But McPhail believes the time has come for the government to automatically collect contributions from the self-employed and pay those contributions into a private pension for them.
2) Reform pension tax relief
Hargreaves Lansdown envisages a government savings incentive calculated as 100 minus a saver’s age. These proposals would include giving the self-employed a more generous top-up to their pension contributions than the current basic rate of income tax.
A 30-year-old self-employed worker would receive a top up of £7 for every £10 they paid into their pension, while a 50-year-old would receive £5 for every £10 they invested.
3) Auto-enrolment combined with individual choice and control
All individuals, employed and self-employed, should be given control and choice over their pension arrangement, according to McPhail.
For the self-employed, the default scheme should be NEST but with the option for an individual to select an alternative arrangement if they desire, he said.