MILLIONS of self-employed people risk heading for old age poverty unless stronger action is taken to help Britain’s “forgotten army” of workers, a report by former pensions minister Steve Webb warns.
The report raises fears for Britain’s 4.4 million-strong army of self-employed people, around one in seven of the working population, among whom pension saving is now at “crisis levels.
Self-employed people are generally not included in the drive to get people saving into a workplace pension under automatic enrolment.
But Mr Webb, now director of policy at Royal London, which published the report, argues the National Insurance system could be used to mirror the process of auto-enrolment and “nudge” more self-employed people into pension saving.
Automatic enrolment into workplace pensions started in 2012 to help head off fears of an old age savings crisis and so far more than six million people have been placed into a pension.
The scheme has been seen as a success in getting people into the savings habit, with around nine in 10 people staying in their workplace pension.
However while nearly two-thirds of self-employed men were members of a pension scheme in the mid 1990s, that number had fallen to less than one quarter (22 per cent) by 2012. At the same time numbers of self-employed people have been growing.
The report recommends that while it may be “politically unfeasible” to force self-employed people to save for a private pension, they could be given a strong nudge.
It recommends that the special category of National Insurance Contributions paid by self-employed people on their profits - Class 4 NICs - should be charged at a higher rate of 12 per cent rather than the current nine per cent.
Instead of the additional contribution being kept by government, they would be able to opt to have that money diverted to a pension or one of the new Lifetime Isas set to launch next year, provided that they made their own direct contribution of at least five per cent. The combined contribution of eight per cent would match minimum contributions under the planned rollout of automatic enrolment.
The report estimates it could increase the number of self-employed pension savers by well over two million if opt-out rates were similar to those for automatic enrolment currently.
Mr Webb said: “Self-employed people are missing out on the surge in pension scheme coverage among employed earners.
“Indeed, whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels. It is time for action.”
Mike Cherry, national chairman of the Federation of Small Businesses said the report makes a “valuable contribution”, adding: “This is a subject which needs much greater thought and attention.”
Huw Evans, director of the Association of British Insurers, also welcomed the report, saying: “This is an important report into an area of public policy that has received little attention in recent years. I hope Royal London’s proposals kick-start the debate that is needed so the decline in retirement saving from the self-employed can be tackled effectively.”