Keith Richards: Auto-enrolment is not a ‘one size fits all’ solution

Auto-enrolment has transformed the UK's savings landscape but, writes Keith Richards, it is not a 'one size fits all' solution for an increasingly complex working environment that includes almost five million self-employed

Since its introduction in 2012, auto-enrolment has transformed the savings landscape in the UK by bringing more than 10 million people into pension saving schemes.

If an employee earns above the £6,032 threshold, they stand to benefit from minimum employer contributions of 2% of their annual salary, with the employee contributing a further 3%. Contribution levels are now set to increase to 3% and 5% respectively from April 2019 but, for many, this will still fall far short of building a meaningful pot.

With average life expectancy expected to reach 100 in the coming decades, and continuing uncertainty over the extent to which the state will be able to support future generations in their retirement, auto-enrolment and a return to a savings culture is now more necessary than ever before. While many will ultimately benefit from auto-enrolment, there is a real risk that too many people fall through the cracks – most notably the self-employed.

The number of self-employed in the UK has risen to more than 4.8 million people, according to the Office for National Statistics – the highest number since records began. This represents 15% of the UK’s entire workforce and, with a cultural shift towards what has come to be called the ‘gig economy’, this figure is only likely to grow.

One of the realities for the self-employed is that they do not typically receive employer contributions, while the nature of self-employment can mean irregular income. Worryingly, less than half of the self-employed are saving into a pension plan of any kind.

The result of this could see a significant proportion of people who worked hard for their entire professional life being forced to live off the state pension in retirement – and in these uncertain times, even a state pension cannot be guaranteed for the next generations, given the additional financial pressure on the NHS and rising care costs an ageing population brings.

Financial empowerment

Auto-enrolment is undoubtedly beneficial for employees, with employer contributions adding more than £6.9bn into pension pots as of 2018. It is important, however, that we recognise auto-enrolment is not a ‘one size fits all’ solution for an increasingly complex working environment.

Efforts are being made to encourage the self-employed to make greater pension contributions from an earlier age, but this will have limited impact without a wider government campaign and engaging professional advice. The Department for Work and Pensions published a report in December 2018 outlining plans for research and trials that will help to build evidence to find ways to assist self-employed to people save for retirement.

It is an opportunity for financial planners across the UK to provide tailored expert guidance for the self-employed within their communities. The fracturing of the traditional labour market and increasingly diverse working patterns do not mean the demand for quality financial advice could decrease – to the contrary.

By some measures, the self-employed are the future of the UK’s labour market. Providing the guidance and tools to financially empower this increasingly important cohort is in the interests of the self-employed, financial planners and legislators alike.

Keith Richards is chief executive of the Personal Finance Society.