How self-employed retirement saving could become the next pensions crisis
While the self-employed have been identified as potential beneficiaries from the Lifetime ISA (LISA), head of retirement policy at Hargreaves Lansdown Tom McPhail, says for many of them it will not fix their long-term savings crisis.
As at July this year there were some 4.76 million self employed workers in the UK, and McPhail describes them as a rapidly growing segment of the economy. However, in 2014/15 self employed pension contributions fell to £1.22bn, the lowest level since 2001, with just 380,000 making a pension contribution.
While he says the LISA is potentially a good product for them to use in 2013/14, out of a self-employed population of 4.204 million, 2.897 million or about 2/3rds would have been ineligible because they were already over age 40.
“We have already proposed reforms to pension tax relief which could deliver more attractive incentives and rewards for the self-employed who do choose to save, but more needs to be done,” says McPhail.
“The government can’t ignore this developing crisis any longer; next year’s auto-enrolment review should be extended to explore ways to give the self-employed the benefits of the same nudges which are currently being used with employees.”
With this in mind Hargreaves Lansdown has put forward three proposals to fix the crisis:
1. Extending auto-enrolment to the self-employed
McPhail says: “ By definition, the self-employed can’t be auto-enrolled into a workplace pension. We believe the time has come for the government to take the bold step of utilising the tax system to automatically collect contributions from the self-employed and to pay those contributions into a private pension for them. We propose using NEST as a default but giving the self-employed the option to choose an alternative scheme if they desire. They should also be given the choice to opt out, but only via the pension scheme and only after they have been defaulted into a pension to start with.”
2. Reform pension tax relief
McPhail says: “Hargreaves Lansdown has developed a set of policy proposals for reform of the pension and ISA rules to make them simpler, fairer and more efficient. We envisage a government savings incentive calculated as 100 minus a saver’s age. These proposals would include giving the self-employed a more generous top-up to their pension contributions than the current basic rate of income tax. A 30 year self-employed worker would receive a top up of £7 for every £10 they paid into their pension, whilst a 50 year old would receive £5 for every £10 they invested.”
3. Auto-enrolment combined with Individual choice and control
McPhail says: “We propose giving all individuals, employed and self-employed control and choice over their pension arrangement. For employees this would mean using their employer’s auto-enrolment scheme as a default option but allowing them to select an alternative scheme to receive theirs and their employer’s pension contributions if they choose. For the self-employed, the default scheme should be NEST, but with the option for an individual to select an alternative arrangement if they desire. The DWP has a long-standing commitment to conduct a review of auto-enrolment in 2017.”
A final possible option would be extending the Lifetime ISA for all. “In theory, the Treasury could extend the LISA to the over 40s,” says McPhail. “Doing this would add billions to the cost of the policy, would substantially undermine pension provision and would create an even more confusing savings landscape than already exists today.”