Venturing to Retire

Boosting long-term savings and retirement security of the self-employed

RSA
RSA
Apr 17, 2018 · 11 min read

The missing millions

A little under four years ago, the RSA published its first major study on self-employment. Salvation in a Start-Up, as the report was called, highlighted that record numbers of people were turning their hand to running a business, and that this was broadly speaking a positive trend driven by opportunity rather than necessity. Half a decade later and our position remains the same. While some people are undoubtedly pushed into self-employment against their knowledge or better judgement, study after study has shown the vast majority choose it to gain more freedom, to work around their needs and the needs of loved ones, and to make their mark on the world. Only a fraction live up to the stereotype of the oppressed precariat.

Why pensions matter

At this point, it is common to hear the refrain that not everyone needs a pension. The self-employed may have alternative long-term saving strategies, not least investing in property. Indeed, the self-employed seem to have a special affinity for bricks and mortar, with nearly half (46 percent) saying this is the safest way of saving for retirement, versus a quarter of employees. Yet property is not as failsafe as many would believe. The market may falter in the near future, making it difficult if not impossible to sell up. Equity release can be used to access funds without moving home, but is often eye-wateringly expensive. Property is also less tax efficient than pensions, given the imposition of Stamp Duty.

What’s stopping them?

Pensions are not a panacea. But as far as long term saving vehicles go, they are the best and safest option available. Why, then, is the take-up rate so low among the self-employed and falling further still? One answer is a matter of simple arithmetic. The full-time self-employed take home a third less in pay than their counterparts in salaried employment, making it difficult to find spare income to put into reserve. The self-employed are also known to have volatile incomes, meaning they are wary of locking away money in a pension which they could need at any moment, for example should they fall sick or have a dry spell in the business. Late payments compound this problem.

Four pillars, 12 fixes

So what is the solution? No shortage of ink has been spilled on the subject of boosting pension coverage for the self-employed. However, past analysis has suffered from several flaws. One of these is the tendency to search for a singular answer when a multi-pronged approach is needed, given the heterogeneity of the self-employed workforce. Another is that self-employment and employment have often been treated as two separate enclaves when in reality people move freely between them during their careers. Most of all, there has been an overzealous fixation on the question of how to get the self-employed saving, with far less attention paid to whether they are saving enough or can access those savings before and after retirement. This report broadens the debate to cover four pillars of retirement security, and lays out several interventions underneath each:

  • Saving enough — The self-employed must be supported to raise their contributions to a sufficient level. This could mean implementing an auto escalation system, whereby the self-employed commit to gradually increasing the percentage of revenue or profits diverted into a pension. Another idea is to present the self-employed with more timely information on the state of their finances, thereby allowing them to make better judgements on what they can afford to save. Over time, the new Pensions Dashboard should be transformed into a more comprehensive Money Dashboard. This would contain information on every aspect of a saver’s finances — from pensions to ISAs to current accounts and even debt obligations. The government should also expand the remit of the new Single Financial Guidance Body to offer not only guidance but impartial advice.
  • Accessing savings before retirement — The self-employed need greater access to their savings to see them through bouts of illness and periods of feast and famine. But taken too far, liquidity could lead to excessive pension drawdowns. The pensions industry should consider introducing a ‘sidecar’ pension product that would wrap together two accounts in one: an accessible rainy day fund and a standard pension. Money flowing into this product would be automatically split between the two pots, until a threshold has been reached on the rainy day fund. We also recommend the government take measures to address the lack of sick pay among the self-employed, which indirectly hinders a long-term savings culture. This could mean presenting an income protection (IP) insurance policy to the self-employed as they complete their tax self-assessment.
  • Accessing savings after retirement — Finally, the self-employed must be supported to make careful use of their savings after they retire. With the advent of new pension freedoms — namely the removal of a compulsory annuity — individuals risk spending too much of their money too quickly, leaving insufficient funds to pay for potential care needs in later years. While this risk afflicts both the self-employed and employees, the former are likely to have smaller pension pots and must therefore manage them more cautiously. As recommended by the Centre for Policy Studies, and recently endorsed by the Work and Pensions Select Committee, the government should introduce a system of ‘auto protection’, which defaults savers onto a drawdown scheme at the age of 65, withdrawing five percent from their funds every year. In addition, the government should throw its weight behind Collective Defined Contribution schemes, which would provide a guaranteed income in retirement.

Tax relief for the many

Each of these recommendations aims to make it easier for the self-employed to prepare for retirement. Yet this group of workers will continue to face penury in old age unless we grapple with a more fundamental question: where will the money to save come from? Recall that many of the self-employed subsist on low incomes (even if a minority are asset-rich), with half earning below the National Living Wage.

RSA Reports

The latest thinking from the RSA's Action and Research Centre

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The mission of the RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce) is to enrich society through ideas and action.

RSA Reports

The latest thinking from the RSA's Action and Research Centre