Can the UK reduce the self-employed pension gap?

30 January 2024

Written by Retirement Line Updated: 30th January 2024

Latest research shows that pension saving among the self-employed population in the UK continues to fall at a dramatic rate. This is despite an increased policy drive to boost pension saving among this group.

The Institute for Fiscal Studies (IFS) has found that private pension participation among the self-employed fell from 33% in 2005–06 to just 14% in 2014–15. 

This compares with 57% of working-age private sector employees saving in a workplace pension in 2014–15.

The study also compared self-employed workers earning £30,000 in 2014-15 with private employees earning the same amount in the same period. They found that around 60% of employees contributed to a pension scheme, compared to just 20% of self-employed workers.

To conduct their research the IFS analysed patterns of private pension saving among the self-employed using administrative tax data. The group of people analysed are all aged 22–64, have been strictly self-employed for five consecutive years or more.

Why are the self-employed saving less for their retirement?

According to the study, self-employed workers may be more likely to opt in and out of pension saving due to their more volatile incomes. For instance, they might opt out of saving for their pension when they have a bad year, then opt back in when things are looking more positive.

Of those self-employed workers who do put money away for their retirement, nearly a quarter are choosing to save a ‘round’ monthly or annual amount. The typical amount being saved is £50 a month (£600 per year), with many rarely changing the amount.

In fact, a staggering 60% of self-employed workers were still saving the same round amount nine years later.

In contrast, employees in the study most commonly opted for a percentage of earnings to determine their contribution level. This is important because it means their percentage contributions will rise over time in line with any salary increases. This may also help to inflation-proof their pension pot, as salary increases will hopefully match or exceed the rate of inflation over time.

Recommendations for self-employed workers

Of course, it’s never too late to save for your future and the research does make some helpful recommendations for self-employed workers. 

The study suggests using a form of auto-escalation to boost your pension savings. This could include using a direct debit that increases in line with inflation, or a different percentage rate of your choosing. By saving in this way, you can help to combat the effects of inflation and protect the real value of your money.

The IFS also suggests policy changes to boost the pension participation rates of self-employed workers. For example, they recommend the government considers building in default pension saving methods to the self-employed tax system.

However, with a large proportion of the self-employed being low earners, the full State Pension may well be sufficient to replace their typical annual income. 

The report does note that it is the higher earning self-employed who the government should target their policy planning towards. This group can afford to make the contributions and are most at risk of seeing a significant decline in their living standards in retirement if they do not plan sufficiently now.

Talk to Retirement Line about your annuity options 

If you are 55+ and thinking about accessing all or some of your pension savings soon then our Annuity Specialists are here to help you. 

In addition to answering your questions about annuities, they will also check the annuity rates you can achieve based on your individual circumstances. 

You can speak to our team today by calling freephone 01733 973038 or request a free call back here. 

Alternatively, use our free online tool to discover how much annuity income you might expect to achieve from your pension savings.