Millions of self-employed people are being left without the simple, effective route into retirement saving enjoyed by employees.
That is the conclusion of a new thought leadership paper from the Society of Pension Professionals (SPP), The Missing Millions: Rethinking Pension Policy for the Self-Employed, which calls for a fundamental rethink of how the UK helps people who work for themselves build financial security for later life.
Automatic Enrolment has transformed pension saving for employees by making saving the default. But the self-employed have largely been left to navigate retirement planning alone. The self-employed are left to decide whether to save, find a pension, choose investments and work out how much they can afford, often while managing unpredictable income and fluctuating cash flow.
The result is a stark participation gap. The current Pensions Commission’s interim report found that just 4% of wholly self-employed workers are currently saving into a pension.
The paper argues that this is not simply a question of individual choice or financial capability. It is a design problem which the SPP have likened to being an obstacle course for the self-employed compared to an escalator for employees. There is no equivalent workplace default, no employer contribution and no payroll mechanism to make saving effortless. Fixed monthly contributions can also sit uneasily alongside the ‘lumpy’ income patterns of freelancers, sole traders, contractors and business owners.
And the challenge extends beyond sole traders. Around three-quarters of UK private sector businesses have no employees other than their owners, creating a huge cohort of micro-business owners who can fall outside the practical benefits of the workplace pension system.
The SPP paper sets out a range of potential solutions, including:
- Using the tax system to create a default route into pension saving.
- Developing flexible ‘autosave’ models through banks, accountancy platforms and other intermediaries, allowing contributions to reflect actual income and cash flow.
- Creating or extending default pension arrangements for the self-employed, potentially using existing DC master trusts or a state-backed scheme.
- Using behavioural prompts, micro-saving and targeted support to make voluntary saving simpler and more accessible.
- Exploring whether Collective Defined Contribution (CDC) could eventually provide the self-employed with a straightforward route to turning pension savings into retirement income.
- Making existing pension saving easier to continue when people move from employment into self-employment.
The paper stresses that there is no single solution for such a workforce as diverse as the self-employed. The priority should instead be to build a system that combines the behavioural power of defaults with the flexibility required by self-employed workers.
With the Government and Pensions Commission considering the future direction of UK pension policy, the SPP argues that the treatment of the self-employed must now be brought firmly into the debate.
Martin Willis, Chair of the SPP’s Self-employment Working Group, said:
“Automatic Enrolment changed the default to ensure millions more employees save for their retirement. But millions of people who work for themselves have never benefited from that same principle. We cannot expect a modern, flexible workforce to thrive in a pension system designed around a traditional payroll. The challenge now is to remove the obstacle course facing the self-employed and create a simpler, more flexible route to retirement saving. If Automatic Enrolment defined the pensions reform of the last generation, finding a solution that works for the self-employed should be at the heart of the next.”
