The latest Financial Resources survey from the DWP showed that in the 2019/20 financial year only 18% of working-age adults that were self-employed were participating in a pension. This is compared to 75% of employees of the same age.
When you consider that these figures are pre-pandemic, and the self-employed largely received the least support in the last 18 months, then the picture is only likely to have got worse. Nest Insight analysis reports that 61% of self-employed people reported a decrease in income between April 2020 and February 2021, compared to 37% of employed people.
Some of this difference in pension participation is, of course, down to the success of auto-enrolment, which has significantly boosted take-up for employees. However, there is more to the disparity than auto-enrolment alone.
The Institute for Fiscal Studies (IFS) R181 report issued late 2020 looked at what has been happening with the self-employed and savings over the last twenty years – both in pensions and other savings vehicles.
In 1998 the difference in pension take-up between the self-employed and employed wasn’t anywhere near as pronounced today. 48% of self-employed were actively contributing to a pension, whereas around 64% of employees were, so the shift to the 18%/75% we have now is significant.
Auto-enrolment may explain the growth amongst employees but doesn’t explain the significant drop for the self-employed and the chasm that has opened between the employment classes.
In terms of the wider savings picture, the IFS looked at alternative saving methods such as savings accounts, ISAs and shares and found no evidence that saving in financial assets or other property has increased to offset the decline in pension savings that have been observed. The only savings that had gone up for the self-employed were in relation to owning the home they lived in. But this was put down to the increased costs involved, and a similar increase was seen for the employed as well, and this group’s overall savings rate hasn’t declined in as dramatic a fashion.
The changing demographic of the self-employed over the 20-year period examined doesn’t explain the disparity either. The proportion of self-employed who are female has increased slightly, average age is up by just under two years and there is an increase in those working part-time. But if savings patterns had remained the same, then these changes would be expected to account for a 5% drop in pension savings – compared with an actual drop of 31%.
Relatively speaking income for the self-employed has declined, and affordability is still the main barrier for many. However, the highest-earning self-employed were those whose savings rate had dropped the most.
One factor not examined as to why this group is not choosing to save more is income volatility. And for a self-employed individual with volatile income, flexibility will be important. The events of the last 18 months will only have accentuated this.
Tax relief will be important to higher earners, but also the ability to start and stop contributions as appropriate. Carry forward may also be useful in mopping up any unused annual allowance in good years and reducing contributions when needed. Younger clients may want to consider using a Lifetime ISA for some of their saving. For basic rate taxpayers, the bonus is the same as tax relief in a pension, and in an emergency, they can still get their funds out at any time, albeit with a penalty for doing so.
With the pandemic hitting the self-employed sector particularly hard it is even more important that steps are taken to promote savings in this demographic. If people are struggling during their working lives, they will struggle more so in retirement, making it vital to save what they can, when they can.
Guy Opperman has stated that the government are committed to increasing retirement savings amongst the self-employed but acknowledges there is no straightforward way to do this. The DWP have been working with Nest Insight on email trials with different subject lines to prompt action and are now developing technology-based tools to make it easier for the self-employed to save.
In the meantime, we can all help get the message out on flexible saving. Results from two financial wellbeing surveys conducted in November 2019 and November 2020 reveal that average perceptions about the importance of saving for an emergency – unsurprisingly – rose (from 85% to 88%).
The email trials from Nest Insight showed that messages highlighting flexibility were the best received across all demographic groups, with “tax-free” subject lines and affordability messages also doing well.
Interestingly they also found that the majority of self-employed were open to automatic saving – 57% liked the idea of automatically diverting a proportion of income into retirement saving.
There is clearly an opportunity now to use this crisis in a positive way to encourage more self-employed to save and it is encouraging to see policy moving in this direction.
Lisa Webster is senior technical consultant at AJ Bell