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Britain's self-employed face pensions crisis in retirement

written by Bella Palmer
retirement

Affordability, lack of trust in pension firms and understanding of how pensions work were the top reasons cited by self-employed people for not saving into a pension fund

Britain's self-employed workers face a pensions crisis in retirement as the numbers saving into a fund has fallen off a cliff, a new study suggests.

Fewer than one in five of the UK's self-employed are now saving into a pension compared to 48 per cent two decades ago, the figures reveal.

Thanks to the shock decline, more than 3.5million self-employed people of working age are currently not putting money aside into a private pension, according to the Institute for Fiscal Studies (IFS).

The financial pressures of Covid-19 and the lack of Government support available to freelancers - some of whom now face tax bills higher than this year's earnings - is set to make pension saving even more challenging for these workers in future.

Affordability was the top reason cited by self-employed people for not saving into a pension fund. Lack of trust in pension firms and understanding of how pensions work were other common reasons - although many said they had alternative ways of saving.

In 1998, 48 per cent of working-age self-employed people were saving into a private pension, but by 2018 this had fallen to just 16 per cent, the IFS said.

By contrast, the launch of automatic enrolment in 2012 has boosted the number of employees saving into a pension, and by 2018 nearly 80 per cent of working-age employees were contributing to a scheme.

The IFS found that pension saving has dropped off among self-employed people who earn reasonably high levels of income and those who are established in their business.

Nearly 70 per cent of the self-employed people who were earning more than £500 a week were saving into a pension in the late 1990s, compared with 24 per cent by 2018/19.

More than 60 per cent of those who had been self-employed for longer than seven years were putting money into a pension until 1998/99 but by 2018/19 this had fallen to 23 per cent.

The research was funded by the IFS Retirement Savings Consortium and the Economic and Social Research Council, drawing on data from the Family Resources Survey and the Wealth and Assets Survey.

The IFS said its findings indicate that attitudes towards pensions among the self-employed do not appear to have changed over the past decade in a way that could explain the decline in pension saving.

It found most self-employed people believe that saving in property is safer and gives a higher return than pension saving, but this conviction has persisted throughout the period it looked at.

Heidi Karjalainen, a research economist at IFS and one of the authors of the report, says: Particularly concerning are the huge declines in participation among the more long-term and more well-off self-employed.

These are groups who will particularly need to save privately for retirement on top of the state pension to avoid falls in their standard of living when they stop work, Karjalainen said.

The Federation of Small Businesses' national chairman, Mike Cherry, says: These worrying figures are a stark reminder of the need to find fresh ways to help sole traders put more aside for the future.

He continues: The IFS's research highlights yet another area where the self-employed don't enjoy the same benefits as employees. If you're a member of staff, there's some real legislative protection there. If you're self-employed, you're on your own. It's important that our tax system fairly reflects these discrepancies.

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