The self-employed should be auto-enrolled into a pension scheme through the self-assessment process, the Taylor review has suggested.
Published on 11 July, the review backed Aviva and Royal London’s previous proposals of having an annual self-assessment process to default the self-employed into pension saving.
It welcomed the Conservative party manifesto commitment to make auto enrolment available to the self-employed.
“When the individual provided HMRC with their self-assessment, as well as providing funds to cover income tax and NICs liability, they could also be expected to provide 4% of income towards a pension unless they choose to opt out,” the review said.
Disagreement over LISA
The review also cited the Lifetime ISA (LISA) as a “good opportunity” to incentivise the self-employed to save for the future.
The savings product lets people under the age of 40 save up to £4,000 each year and receive a 25% bonus from the government, paid annually at the end of the tax year.
Former pensions minister Ros Altmann disagreed however, saying the LISA was not an appropriate product for the self-employed for a number of reasons.
She pointed out that many self-employed people tended to be over the age of 40, but a LISA could only be opened between ages 18 and 40 and therefore wouldn’t be available to them.
She also said a product with an exit penalty like the LISA would not be right for the self-employed, who typically need a flexible product to access extra funds if need be.
“The point with self-employed people, and why they may not want to use a pension, is that they’re worried they might need money to tide them over when business has a bad patch, but if that’s the case, they want a flexible savings product that won’t penalise them for getting their own money back – and that’s not a lifetime ISA,” she said.
‘U-Turn on the U-Turn’
The review highlighted the prospect of a U-turn on the U-turn in increasing class 4 national insurance (NI) contributions after all.
Chancellor Philip Hammond was forced to U-turn on his proposal to hike class 4 NICS for the self-employed just days after giving his Budget speech earlier this year.
The review stated: “The different rates of NI in particular mean that the UK system of taxing labour is not neutral – a self-employed person doing the same work as an employed person can pay a different amount of tax or NI despite receiving similar contributory benefit entitlements in return.
“The review considers that this situation is not justified, or sustainable, nor is it conducive to the goal of a good work economy.”
AJ Bell senior analyst Tom Selby said bringing the class 4 NICs paid by the self-employed into line with those paid by employed people may be logical, but “won’t be easy”.
“The government has already been forced into one embarrassing U-turn on raising class 4 NICS and, given Labour’s commitment to not increase personal ICs and Theresa May’s flimsy majority, a second attempt to hit a parliamentary brick wall,” he said.
Former pension minister and Royal London director of policy Steve Webb was more enthused by the review however, saying he welcomed the focus on the gap in retirement saving for the self-employed.
“Our research shows that the lack of retirement provision amongst the self-employed is reaching crisis levels and needs to be addressed.
“The government now needs to build on the momentum for action in this area and take forward the proposals on pensions and auto-enrolment as a matter of urgency,” said Webb.