An alarming study warns that U.K.’s future retirees are slowly inching towards a massive hole in their retirement savings that could put them at a risk of financial disaster.
According to the findings, the increasing shift towards self-employment is creating a pension gap that could swamp the state pension and prompt pensioner poverty, which could ultimately lower living standards in the country.
Growth of Self-Employment Sector
Since the year 2000, self-employed sector has seen over 50 per cent growth, reaching 5 million independent workers in total, according to a research by the Association of Independent Professionals and the Self-Employed (IPSE).
These statistics offer a huge warning sign for the government that if they don’t take immediate action, the ever-widening gap in retirement savings between the self-employed and employed workers could lead to a financial downfall.
While employed workers are automatically being enrolled in workplace pension programs, more than two-thirds of the self-employed population isn’t saving adequately for retirement. This could lead to a major difference between the two groups’ quality of life.
IPSE’s senior policy advisor, Jonathan Lima-Matthews, said that there is already major pressure on state pension and many have been questioning its future over the recent years. If the government doesn’t address the current pension crisis faced by the self-employed population, it could put the state under heavier burden.
He added that a large number of self-employed people are expected to enter retirement with little to no savings in the next few years – and given the upward trend in entrepreneurship, this number could increase even further in the future.
Without any savings, these retirees will have to rely on measly state pension as primary source of income which could lead them down a path of pensioner poverty and lower living standards.
Lack of Interest in Retirement Savings
The newer self-employed workers, especially young women, are the most at risk of being exposed to this pension crisis. The IPSE report cites a number of reasons for the younger generation’s lack of interest in saving for old age.
The most prominent cause is the lack of auto-enrolled retirement programs for smaller enterprises and sole proprietorships.
A lack of education on the importance of retirement savings is also to blame for this impending crisis. Jonathan says that most people think of old-age savings as a distant prospect with no immediate returns, which is why they don’t start saving as early as they should.
There could be a few solutions to this problem. One of them, suggested in the report, is “sidecar pension” which would automatically take money from the worker’s earnings and funnel it into an emergency fund as well as a pension pot. Other solutions include an MOT midlife savings account and emphasis on financial education in colleges and universities.
Jon Greer, Old Mutual Wealth’s head of retirement, says that self-employment often comes with a lack of security in terms of income, especially in case of people who earn low to moderate income.
It’s alarming to know that only a third of self-employed workers are financially prepared for retirement. These numbers aren’t likely to change in the future unless the government intervenes. But that doesn’t mean that the same auto-enrollment program traditionally used by employers should be extended to the self-employed as well.
Auto-Enrolment For Self-Employed
However, there are a few proponents of the auto-enrolment for the self-employed. According to Aegon’s pension head, Kate Smith, auto-enrolment pension program has helped workers get into the habit of saving for retirement, but this effort hasn’t been extended to the self-employed industry which has created a gap in old-age savings.
Policymakers need to devise a sensible framework to support an incredibly diverse workforce. Smith believes that the auto-enrolment nudge for the self-employed could do the trick in bridging the pension gap.
Tom McPhail of Hargreaves Lansdown observes that most self-employed people generally start their professional careers with employment for others, which is when they are automatically enrolled in pension programs.
However, when they choose to make the switch to self-employment somewhere in their 30s, they are opted out of these programs, which could be the real problem here. Policymakers need to find a way to keep people enrolled in pension programs even after they make this pivotal transition in their careers.