The self-employed should either be able to make an active choice about pension contributions in their self-assessment tax returns or enjoy a form of auto-enrolment via HMRC if they meet a certain trigger, the Institute for Fiscal Studies has proposed. Among those already saving into a pension, it suggests introducing auto-escalation to improve adequacy.  

The proposals were made in a new IFS report published on Monday, ‘Private pensions for the self-employed: challenges and options for reform’, sponsored by the abrdn Financial Fairness Trust. The authors came to the conclusion that although not all the evidence points to inadequate saving among the self-employed,  the status quo is “no longer fit for purpose, particularly given the effort the state has put into making pension saving easy for employees and the extent to which the self-employed are no longer engaging with personal pensions”.  

Only a fifth of self-employed people with income of over £10,000 save into a pension, the report says, a proportion that has remained unchanged since the early 2010 and fallen since 1998, while auto-enrolment has brought millions of employees into pension saving. The figures come as the Institute and Faculty of Actuaries separately projects that not starting a pension early means losing out on £300,000 in retirement.  

Laurence O’Brien, a research economist at the IFS, said successive governments have put great effort into establishing auto-enrolment for employees, while the self-employed “are left to their own devices”. 

 

Policymakers have two main options to help the self-employed save for retirement, both relying on the fact that self-employed people have to fill in a tax return, said David Sturrock, senior research economist at the institute. 

 

“Using that system, the government could either get the self-employed to make an active choice over whether to save into a pension or lifetime ISA, or enrol them automatically into a long-term savings plan, which they could opt out of. Either way would reduce the hassle cost that self-employed people face when looking to save for retirement,” Sturrock said. 

 

Over half (52%) of the self-employed have accumulated no private pension savings to date, according to the IFS, and about 55% of the self-employed might not have any pension savings to supplement their state pension entitlement in retirement if they continue building up pensions at the same rate as now.  

Assuming self-employed people continue to save the same proportion of earnings for the rest of their careers, three-quarters would not achieve the ‘minimum income’ standard by the Pensions and Lifetime Savings Association. The PLSA’s minimum retirement living standard proposes a single income of £14,400 or a joint income of £22,400 in retirement when living outside the capital. 

However, many of the self-employed with inadequate pension savings are young, meaning they could get back on track more easily than those in older age groups, the IFS notes.  

Despite the sobering picture when looking at pensions alone, the IFS suggests that taking into account non-pension wealth means the outlook might not be as bleak as feared. The self-employed tend to accumulate wealth outside of pensions; if property other than the main residence, financial wealth and business assets of the self-employed over 50 are included to calculate retirement income, 20% more are on track to hit their target replacement rate, it found. Among the over-50s, more than half have total wealth of more than £250,000. Among those 35-49, close to 30% are in that wealth bracket. 

Things also look up if partners’ retirement incomes and future inheritances are taken into account. Although it is not a given that partners will share their wealth, “for a substantial proportion the outlook may not be as stark as individual-level modelling implies”, the report states.  

The Conservative party’s 2017 manifesto included a commitment to “continue to extend auto-enrolment to small employers and make it available to the self-employed". With the Automatic Enrolment Review 2017, the government said it would trial different approaches to help self-employed people save for retirement. Nest Insight, Lloyds, Barclays, Smart Pension and Aegon took part in trials which, however, focussed mainly on communications. 

The idea of getting the self-employed to save via tax returns is not new either. The 2017 Auto-Enrolment review mentioned it, and the Department for Work and Pensions noted back in 2019 that “a number of interested parties have suggested there may be a potential role for HMRC’s Making Tax Digital (MTD) in relation to self-employed retirement savings”. 

Nigel Peaple, chief policy counsel at the PLSA, said: “If it can be made to work, the self-assessment tax return process has the potential to provide an effective way to empower people to take control of their retirement saving.” 

He stressed that many self-employed workers have highly fluctuating incomes, so they will need some flexibility in how much they save, along with “a simple and regular reminder to contribute more”, Peaple said. 

In 2019, the government said that “although the implementation of MTD for income tax is unlikely to be in place before mid-2020, we are already engaging with software providers who will develop solutions for accounting and self-assessment purposes to explore the scope to also test behavioural prompts focussed on... pension savings”.  

Requirements for MTD for income tax for the self-employed will apply from 6 April 2026 for those with annual business or property income of more than £50,000, and from April 2027 with annual business or property income of more than £30,000.