New pension threat for UK self-employed

Posted on: 28th October 2017 in Pensions

Millions of self-employed Brits risk falling through the pension net even as the government looks to bring them into employers’ schemes – highlighting the need for decent pension planning. Government plans could leave thousands of self-employed workers left scratching their heads as to the structure of their retirement plans, particularly regarding the ‘liquidity’ of their company and other preferred assets such as property, compared to traditional long-term savings products. That’s the conclusion of the latest research from Pension Policy Institute (PPI) and the Old Mutual Wealth Group.

Self-employed Brits and auto-enrolment

Last year, the government sought to make up for years of neglecting the self-employed from worker-focused reforms with a “pension revolution” that would include them in the government’s ‘auto-enrolment’ scheme. Politicians in the Work and Pensions Select Committee vowed that the self-employed – from the blue-collar trades to IT consultants – would have similar structure and support for ongoing retirement contributions as those in a regular nine-to-five. The PPI analysis has poured cold water on that chipper plan – arguing that being self-employed is more different and challenging than just not having an office whip-round on your birthday, and that it could leave a black hole where cash should be in their retirement.

The self-employed: stats and facts

There are almost five million self-employed in the UK; one million were added since 2008, and 83,000 new self-employed workers created in just 2016 alone. The PPI research makes the simple point that many jobs done under the self-employed banner were until recently done by those employed. The self-employed think differently than employed people. Just 28% believe traditional pensions are the way to go in funding their retirement (compared to 52% in ‘regular’ work), the study found, though only 7% thought their businesses’ income would make up the main chunk of what they would live on in old age. They have a higher opinion of property as an investment, with more than half (53%) believing it gets the most out of their money, compared to 40% of employees.

Auto-enrolment: the key issue?

Auto-enrolment is something of a misnomer. You don’t get a fresh pension plan the day you first become your own boss. Instead, it’s a question of ‘opting-in’ to a personal pension. Choosing that pension plan is therefore in the hands of the self-employed – the government simply has legislation that will consider it ‘qualifying’. This choosing – thus ‘opting in’ – is the issue. The PPI’s study found that this selection is falling: around 600,000 fewer self-employed people are contributing to a pension in the last 10 years, leaving the total number that is contributing around 350,000. Overall, only two million would be classed as eligible for the existing auto-enrolment rules – that is, the current products out there would suit them as the principle vehicle for their working-year savings (rather than something on the side of the classic workplace schemes). This is because they meet certain earnings criteria, as well as achieve a regularity with their income stream. This still leaves nearly three million self-employed still not saving long term. The PPI study proposes two other systems in addition to auto-enrolment:

• Maintaining workplace pensions: transition from workplace pensions to individual/personal pensions;
• Alternative products: more appealing savings vehicles, such as Lifetime ISAs.

How might an overall pension solution for self-employed Brits work?

The solution for the self-employed is challenging since the demographic is mixed. Many of them are ‘Baby Boomers’ (which means their earliest memory was The Beatles in the charts), meaning they might well be consultants using their knowledge gleaned over decades, and so have a lot in common with their company-employed counterparts. This is where the rationale of the first alternative – maintaining workplace pensions – has come from: they’ve already contributed for years to workplace pensions, and such a continuation makes sense for these senior people. Others who are self-employed come from what was called Generation X (earliest memory: Thatcher’s last days in office). Again, they could well be experienced solo workers with steady companies and client base. But those declaring self-employment in the last decade also include those on low-to-middle incomes. Post financial crisis, the understanding is that there are a lot in this third category defining themselves as going it alone as opposed to unemployment. There’s evidence some in this category keep working with their previous employer, or at least with one employer rather than a range. The PPI report has pitched a new category for these people – ‘permanent contractors’ – rather than those genuinely ‘self employed’ like the first two categories. The benefit of this classification is that it may make it easier to have such people part of the company plan. Also, it hopefully will clarify their labour and pension rights. Millions of people in the UK on regular company schemes take for granted that their pension scheme has a trustee who looks after their general pension rights in the background.

 So what now for the self-employed Brit and their retirement planning?

It’s important to stress that what’s just been released is a paper warning of how many will slip through the auto-enrolment net as it currently stands. It could take a few years to implement a comprehensive system. By then however, the tectonic plates of self-employment could shift again. As a nation, Britons don’t save enough. We have a savings ratio of just 1.7% in the first quarter of this year, according to shocking findings by TheMoneyCharity, while in the second quarter, 1,230 people declared themselves redundant. Someone is declared bankrupt or insolvent less than every seven minutes – eek! Saving for retirement is the longest-term mission you will have – in addition to being a parent. It is vital that work circumstances, or the drive you have to run your own company, don’t curtail or obscure potential products and solutions. Get a plan in place you can have running in the background for whatever life throws at you. Don’t hesitate to get your head together with that of a financial adviser to review your options and the products out there.