The self-employed should be automatically enrolled into a pension when they submit tax returns, according to a report published by Aviva and Royal London.
Before last month's general election the Conservative Party's manifesto committed to making auto-enrolment available to the self-employed. A planned review of auto-enrolment due to take place this year has also promised to consider how to include self-employed people in the policy.
The government has also commissioned RSA chief executive Matthew Taylor to look into modern employment practices, particularly the rise of self-employed workers.
Following the Conservative victory in the vote, Aviva and Royal London have published a report which sets out four options to include self-employed people in the auto-enrolment policy.
The two providers' preferred policy is to allow the self-employed to sign up for a pension scheme when they complete an annual tax return. This would see a self-employed person nominate a pension scheme of their choice in which they would be able to contribute a certain amount of their taxable profits. The government would also top-up any contribution.
The report suggests 4% of profits would be a good initial starting point for individual contributions. With tax relief this would take individual contributions to 5% of salary, in line with employed peoples' contributions. On top of this the government would top up by 3%, bringing total contributions to 8%.
Aviva and Royal London said this amount was 'a positive first step' but would need to be increased in the future.
The report also said this proposal needs to consider how to communicate the process to the self-employed, how HM Revenue & Customs will transfer funds to pension providers and how the self-employed will keep track of where funds are invested.
'We believe these are small, surmountable practicalities and that initiatives such as the Pensions Dashboard have an important role to
play here,' the report added.
Royal London director of policy Steve Webb said auto-enrolling through tax returns would use the same 'nudge' theories which have made auto-enrolment a success.
'Using the annual tax return process to "nudge" self-employed people into starting saving for their retirement could bring a breakthrough in pension coverage for the self-employed in the same way as has already happened for employees. It is vital that we build on the momentum for action in this area and take forward practical proposals as a matter of urgency,' he said.
The other three options considered by the report were:
- government to match all pension contributions from the self-employed in order to encourage people to save;
- have an 'opt-in' system using the tax return, as opposed to 'opt-out' system favoured in the report;
- use the lifetime ISA to encourage saving.
The report said the first two options would not work because they required people to opt-in, possibly putting them off saving. The report said the final option would not help the self-employed because the lifetime ISA is only open to the under 40s.
John Lawson, head of policy at Aviva, said the report adressed an important issue for the UK.
'The lack of retirement provision amongst the self-employed is reaching crisis levels. While auto-enrolment has helped to reverse declining participation amongst employees, the situation for self-employed workers remains dire. Many will simply be unable to afford to retire unless urgent action is taken,' he said.