Self-employed need planning not the ‘perfect pension’

With more than 4.8 million self-employed people in the UK, recent research conducted by HMRC and Ipsos MORI found their biggest barrier to saving is a lack of affordability.

The proportion of people in self-employment is rising, from around 12% of the labour force in 2001 to around 15.1% in 2016 (see chart 1, above). But the proportion of saving for retirement has fallen.

This is the stark situation that the June 2018 HM Revenue & Customs (HMRC) commissioned report from market research company Ipsos MORI, The drivers of saving behaviour for retirement among the self-employed, sought to investigate. The report did not seek to offer solutions, however there are a number of findings that should inform future pension policy.

The proportion of people in self-employment is rising, from around 12% of the labour force in 2001 to around 15.1% in 2016 (see chart 1, above). But the proportion of saving for retirement has fallen.

This is the stark situation that the June 2018 HM Revenue & Customs (HMRC) commissioned report from market research company Ipsos MORI, The drivers of saving behaviour for retirement among the self-employed, sought to investigate. The report did not seek to offer solutions, however there are a number of findings that should inform future pension policy.

Barriers to saving

The first issue is that the biggest barrier to saving is lack of affordability. This is not a self-employed issue, it is more to do with income poverty.

The UK state pension is known to be one of the lowest in the developed world, with the government making it clear individuals are expected to take more responsibility for their future retirement through private pension savings.

This is a double-whammy for low earners who do not have the wherewithal to save in the first place, and whose contributions when they do are very often linked to earnings. The report found the median gross annual income of the self-employed was £25,662. The answer for this group – both employed and self-employed – lies outside voluntary savings.

The second issue is whether pensions currently meet the needs of the self-employed, who are a highly diverse group.

On the plus side, the report shows there is a distinct group of savers who are engaged with pensions, and that pensions are not as distrusted as many would have us believe – scoring better than bank accounts and ISAs. Chart 2 (above) shows that pension scheme participation has risen since 2009/10 for employees, particularly since the introduction of automatic enrolment in 2012.

Inevitably the ‘pensions endorsers’ tend to be higher earners with more regular income and some investment experience. These people traditionally represent the client base of financial advisers and accountants who can explain the tax advantages and long-term investment benefits.

One of the reasons behind the decline in savings by the self-employed may well be the rise of self-accounting. This means they no longer have access to a financial expert who might well advocate a pension contribution for tax as well as investment reasons.

Perhaps surprisingly, the research also shows that while automatic enrolment is clearly designed to support employed workers, it does help the self-employed to some extent, which may help low to medium paid workers. We certainly should not overlook the fact many self-employed workers have or had employed earnings in the past: 18% of self-employed workers have current earnings from employment, and 30% have a workplace pension that is paid up (see chart 3, above).

The flexibility of modern pension arrangements is therefore beneficial in allowing individuals to build up and then amalgamate their benefits from different types of employment at different times.

On the other hand, the research also shows a significant proportion of the self-employed prefer to save in non-pension assets, for a variety of practical and emotional reasons. Lack of access to their money in case of emergencies is a particular barrier for self-employed workers who are more likely to experience hardship if they are unable to work or if their business is hit by unfavourable economic conditions. It is not surprising therefore that 67% of self-employed people hold ISAs.

Safe as houses?

A somewhat contrary position is demonstrated by the group identified as ‘property endorsers’ who actively prefer investing in property to pensions, although it is noticeable 93% of this group also have ISAs, which presumably deals with the access issue.

More worrying is the perception that property is lower risk than pensions, and that it is considered likely to deliver better returns. This indicates a lack of appreciation of the range of investments available under a pension plan, as well as the benefits of a long-term investment strategy.

Investing in a single asset class is in fact a high-risk strategy in itself, irrespective of the nature of that asset. The ability to pool investments within a range of managed funds is a valuable if misunderstood feature of personal pension plans.

At the same time, choosing to invest in truly low risk assets is likely to limit the potential for returns, leading to disappointment that is blamed on the pension rather than the investment strategy.

Many commentators note the need for better financial education for potential savers. In fact information on the nature of investments is as essential, if not more so, than a description of the tax wrappers available.

Substance over style

Ultimately the ISA and property endorsers are in fact saving, and this is more important in my view than what they are saving in.

This takes us back to the primary issue, which is lack of saving, rather than ‘what is wrong with pensions’. Solving the self-employed savings gap will not be as simple as automatic enrolment for employees, and it is likely several strategies will be required from more than one source.

What we should not do is think the problem will be solved by creating the ‘ideal pension’, which according to this report should be ‘low risk’, ‘flexible’ and ‘rewarding’.

If people want to target a future income, pensions are designed to deliver this. If they want access there is the ISA. And if they want a complementary strategy they can invest in property.

The solutions exist, but it is the planning that does not. 

Fiona Tait is technical director of Intelligent Pensions

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