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Self-employed pensions: insurance giants propose a solution

Cherry Reynard
Written By:
Cherry Reynard

The self-employed should make pension contributions through the annual self-assessment process, say pension groups Aviva and Royal London.

The two groups joined forces to tackle the problem of extending auto-enrolment to the self-employed. Self-employed people tend to have poor pension provision, with only one in seven contributing to a pension in 2014/15. The problem is particularly acute for women and low-paid self-employed workers.

Extending auto-enrolment to the self-employed was part of the Conservative Party’s manifesto in June, but there were no details on how it would be done.

The favoured solution by Aviva and Royal London is to use the annual self-assessment process to default the self-employed into pension saving. As part of completing an annual tax return, self-employed people could nominate a pension provider to receive contributions and would have a sum automatically added to their total tax bill

They suggest contribution levels equal to 4% of their taxable profits (equivalent to 5% once standard rate tax relief is added). Using a percentage would mean the contribution could vary with income.

John Lawson of Aviva, said: “The lack of retirement provision amongst the self-employed is reaching crisis levels. While automatic enrolment has helped to reverse declining participation amongst employees, the situation for self-employed workers remains dire. Many will simply be unable to afford to retire unless urgent action is taken.”

Steve Webb, director of policy at Royal London, said: “Automatic enrolment has shown the power of ‘nudges’ to get people saving. Using the annual tax return process to ‘nudge’ self-employed people into starting saving for their retirement could bring a breakthrough in pension coverage for the self-employed in the same way as has already happened for employees.

Nathan Long, senior pension analyst at Hargreaves Lansdown, raised doubts about the plan, saying that while recommendations to deduct 4% of profits at the point of compiling a tax return and paying them to a pension provider of the persons choosing are inherently sound, auto-enrolment’s success is partly attributable to the fact it requires no engagement.

He believes the recommendations need to go one step further and have a default pension provider in place, and that should be NEST.

Are you self-employed?

  • If you are self-employed and have no pension provision you may be wholly reliant on the state pension, currently £122.30 per week.
  • You can start a personal pension or SIPP through a platform provider, such as Fidelity or Hargreaves Lansdown, or through the major insurance groups such as Standard Life, Aviva and Royal London.
  • If you have a limited company, you can auto-enrol quickly and easily through NEST, the main government-sponsored scheme.
  • It is better to do something small than nothing at all. Even small amounts can compound over time.