Self-employed retirement saving: the next pensions crisis
The Savings Bill to introduce the Lifetime ISA is currently working through the process of parliamentary scrutiny. The self-employed have been identified as potential beneficiaries of the LISA and for a minority of them this may be true, however for most of them, the LISA will not fix their long-term savings crisis.
- Self-employed numbers are rising relentlessly as the economy evolves more flexible working patterns
- Retirement provision among the self-employed has collapsed in recent years
- Auto-enrolment review in 2017 should encompass self-employed
- Hargreaves Lansdown pension tax review would strengthen incentives for self-employed retirement saving
- Lifetime ISA will miss much of its target market
- 3 proposals to fix the problem
Hargreaves Lansdown is calling on the government to include the self-employed in its forthcoming review of auto-enrolment in 2017.
Tom McPhail, Head of retirement policy:
"The self-employed are a rapidly growing segment of the economy, yet savings policy has completely left them behind. Most of them aren’t saving in pensions and most of them aren’t eligible for the forthcoming Lifetime ISA. 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. 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."
- At July 2016, there were 4.76 million self-employed workers in the UK
- In 2014/15, self-employed pension contributions had fallen to £1.22 billion, its lowest level since 2001
- In 2014/15 just 380,000 self-employed people made a pension contribution, out of a population of 4.59 million
- The Lifetime ISA is potentially a good product for the self-employed, however in 2013/14, out of a self-employed population of 4.204 million, 2.897 million or around 2/3rds would have been ineligible for a LISA because they were already over age 40
3 Proposals to fix the problem
1. Extending auto-enrolment to the self-employed
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
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
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.
Why not just extend the Lifetime ISA for all?
In theory, the Treasury could extend the LISA to the over 40s. 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.
NOTES TO EDITORS
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