Self-employed are being nudged to ‘save £2.50 a day’ and targeted with ‘loss avoidance’ messages to boost popularity of pensions
- Only a quarter of self-employed people are actively saving into a pension
- State-backed pension provider NEST is testing messages and schemes to boost savings levels
- ‘Set and forget’ plans and ‘sidecar saving’ – a pension/rainy day fund hybrid – are being trialled by the group
- Government is backing the initiative after ditching plans to bring self-employed into the auto-enrolment net
‘Save £2.50 a day’, or just pay ‘what you can when you can’, are among messages being trialled to promote pensions to the self-employed.
Playing up tax benefits, and using behavioural ruses like loss avoidance, are also being mooted as ways to boost retirement saving among people who work for themselves.
Only a quarter of self-employed people save into a pension, even though three quarters believe it’s important to do so, according to state-backed pension provider NEST, which has teamed up with the Government and industry partners on the project.
Retirement planning: Only a quarter of self-employed people save into a pension, even though three quarters believe it’s important to do so
This is Money launched a campaign this year to create a level playing field for self-employed workers, who missed out on the successful auto enrolment initiative that opted 10million employees into pensions.
We uncovered a savings crisis, where almost two thirds of Britain’s five million-strong army of self-employed workers have never saved into a pension, leaving them at risk of running out of cash later in life. Read about our calls for action below.
NEST, the state-run auto-enrolment scheme, says that self-employed people look at pensions and retirement in a different way to other workers.
It says: ‘They tend to save for “the long-term” rather than a specific age or stage of life, using a wider range of savings vehicles including savings accounts, Isas and property, as well as pensions.
How to fix the self-employed savings crisis
This is Money’s campaign makes the following calls for action.
1) The Government should consult on including a prompt to contribute to a self-invested personal pension for all individuals filling out a self-assessment tax return within the tax return.
2) NEST, the Government-backed pension scheme, is currently trialling ‘side-car saving’. This allows savers to contribute to their pension and benefit from tax relief, but if they need early access to some of their savings, they are given this without penalty. This should be extended to Sipps, to allow the self-employed more flexible saving behaviour.
3) The Government should match contributions made by self-employed individuals to their pension to account for the contributions they ‘lose’ by not being employed and eligible for auto-enrolment.
‘Variability and uncertainty of income can create barriers to retirement saving for self-employed people. Flexibility and control are therefore important and there is a preference for some liquidity in savings.’
A survey of 2,000 self-employed workers found that although pension saving levels were low, 55 per cent would welcome more guidance, and 34 per cent already have a private or workplace pension that they could reactivate.
NEST is testing messages to the self-employed, and carrying out trials to sign them up to pensions via payment and accountancy platforms or their trade and industry bodies.
It is also researching what saving methods self-employed people might find most appealing, with the three below proving most popular so far.
Set and forget mechanisms: You set up a regular pension contribution though a payment provider or invoicing or accounting software, and money goes in whenever you are paid without you having to think about it.
‘These captured the idea of saving little and often, but with greater flexibility to irregular and unpredictable incomes than is currently possible in retirement saving for most self-employed people,’ says NEST.
‘The fact that contributions would only be made in proportion to money coming in, rather than at a fixed, regular amount, had high appeal.’
Saving at the point when income is known for the year: When you do an annual tax return there is a prompt asking if you would like to make a pension contribution for this financial year, and the additional tax relief you get on your contribution is calculated and added for you.
‘The group liked the simplicity of only having to consider retirement saving once a year,’ says NEST.
‘However, a number questioned whether they would be likely to actually get around to contributing in this context or have the funds available at that point when they were also completing their annual tax return.’
Combining short-term and pension saving with a sidecar account: You have a ‘sidecar’ pension scheme allowing you to build up a rainy day fund alongside a pension, but after this has hit a certain level all contributions will be diverted into the pension.
NEST says this idea was positively received, but thought potentially complex.
Meanwhile, the messages below are currently being tested among the self-employed.
Palatable contributions: ‘Could you save £2.50 a day?’, describing contributions as a daily rather than a monthly amount.
Pension flexibility: ‘Flexible pension options for the self-employed’, emphasising that you can pay ‘what you can when you can’.
What is pensions tax relief?
This allows people to save for retirement out of untaxed income.
The rebate you get from the Government on your pension contributions is based on your income tax rate of 20 per cent, 40 per cent or 45 per cent.
Tax benefits: ‘A tax-free way to save for your retirement’, explaining tax relief on pension contributions.
Loss avoidance: ‘Don’t miss out on pension returns’, framing this in terms of what people might lose.
NEST’s research found that the average age of self employed people is 47, and 80 per cent are over 35. Their median income – the mid-point figure – is £24,000, but 18 per cent earn less than £10,000 from all their income sources.
The gender split is 64 per cent male and 36 per cent female, and 88 per cent have been employed at some point in their working life.
Half are not confident about how they will fund retirement, and 35 per cent admit they put off thinking about pensions because it makes them nervous.
Among those not currently saving for old age, 65 per cent say they can’t afford it and 61 per cent are put off by the lack of flexibility.
Jo Phillips of NEST Insight, the research arm of the organisation, says: ‘Although most self-employed people say they want to save for retirement, many struggle to do so in practice.
‘Encouragingly most are open to help, guidance and encouragement to get on track with saving for later life.”
‘We know that self-employed people are a highly diverse population and it will be tricky to find a one-size-fits-all approach.
‘By asking self-employed workers what they want, we’ve taken a significant step forward to discovering what those solutions might look like.
‘We’re excited to have moved into the second phase of our research, using this information to help us test real, practical solutions tailored to the needs of self-employed people.’
Pensions Minister Guy Opperman, whose department is supporting the NEST initiative, says: ‘We want to boost the future prospects of millions of hard-working self-employed people, including younger and lower-paid workers, and that’s why we’re trialling various approaches which could help them plan ahead financially for later life.’
The Government ditched a manifesto commitment to bring self-employed workers into the auto-enrolment net in favour of nudging self-employed people to provide for their retirement, and looking at ways technology could be used to do this.