Nearly two million self-employed workers in the UK are facing a looming pensions crisis, driven by inadequate savings, according to the Institute for Fiscal Studies (IFS). The IFS has issued a stark warning that without urgent intervention, these individuals could experience significant financial hardship during retirement.
The issue arises as the majority of self-employed workers have not made sufficient pension contributions, with current trends indicating a substantial decline in savings rates among this group over the past 25 years.
The latest report reveals that only 500,000 self-employed individuals earning more than £10,000 annually are contributing to a pension, leaving a staggering 1.8 million without any pension savings. This marks a significant decline in savings rates among the self-employed over the past 25 years. In 1998, nearly two-thirds of self-employed workers saved into a pension, whereas now the majority have never contributed to one.
This bleak projection underscores the urgent need for action to boost retirement savings among the self-employed. Projections indicate that a typical self-employed person aged between 25 and 34 can get back on track by saving 9% of their income annually, while those in their 50s would need to save 18% to achieve an adequate retirement income.
The success of auto-enrolment for private sector employees, which has seen workplace pension participation soar from just over 40% to more than 85% since 2012, underscores the potential benefits of similar schemes for the self-employed, who are not currently covered by this system.
The report also recommends encouraging the self-employed to increase their pension contributions over time to counteract inflation. This approach could align private pensions more closely with the state pension system, which benefits from the triple lock, increasing payments by the highest of inflation, average wages, or 2.5%.
The DWP’s response indicates a potential shift in policy to address the pensions gap among the self-employed, reflecting broader concerns about financial security in retirement for this growing segment of the workforce.
Ultimately, the findings of this report highlight the need for immediate and sustained action to prevent a future pension crisis, protecting the financial wellbeing of self-employed individuals.
Implementing auto-enrolment and promoting increased pension contributions are essential steps to ensure the financial security of nearly two million self-employed workers in the UK.
The looming pensions crisis for self-employed workers is a pressing issue that necessitates immediate intervention from policymakers. Without substantial changes, millions face the prospect of financial hardship in retirement.
Implementing strategic measures such as auto-enrolment and increasing contributions can significantly alter the retirement landscape, providing much-needed security for the self-employed.
