How to help the self-employed increase their retirement savings

Just before the pandemic, the self-employed made up about one in seven of the workforce, and while that’s likely declined somewhat during the pandemic, it’s still much larger than it was a generation ago, driven by the growth of self-employment in the decade after the financial crisis.

Despite the growth in the number of self-employed over the years, retirement savings for this group have continued to decline.

A recent report from the Office of National Statistics paints a truly heartbreaking picture of retirement prospects for many people.

Almost a third said they did not expect to have a pension beyond the state pension when they retire, and a particular lack was highlighted among the self-employed.

While it’s no surprise that the self-employed generally have lower levels of retirement savings, more concerning is the fact that only 20% of the self-employed said they had contributed to a pension between April 2018 and March 2020, which shows how dire the current situation is.

By comparison, 80 percent of employees were contributing to a pension – largely through self-affiliation, which the self-employed cannot benefit from. This latest data does not yet cover the pandemic and it is likely that the results paint a more positive picture than would be the case had this been taken into account.

Self-employed retirement savings – or more precisely the lack thereof – has long been a problem.

The Financial Resilience All-Party Parliamentary Group’s recent report on people’s financial resilience during the pandemic highlights the lack of retirement savings among the self-employed, and the cost-of-living crisis serves to further expose the risks of under-saving.

Most of the data that explores the retirement savings of the self-employed examines them by considering all the self-employed as belonging to the same category. However, if they can all tick the self-employed box, it does not mean that they form a homogeneous group. In fact, they are far from it.

We understand from research we have conducted with the Retirement Policy Institute in 2017 that the self-employed include a large number of groups with different characteristics, behaviors and levels of savings.

The main results found:

  • The self-employed seem to have an overall total wealth equivalent to that of employees, even if the sources of this wealth differ.
  • The self-employed depend much less on pensions, with only 28% believing that pensions are the safest way to save, compared to 52% of employees.
  • Seven percent of self-employed people believe most of their retirement income will come from their business.
  • The self-employed have a more positive perception of real estate than their salaried counterparts, both in terms of security and profitability – 53% believe that real estate will get the most out of their money compared to 40% of salaried people.

Moreover, we found that the self-employed mostly actively choose not to save for their pensions.

Simply put, at one end of the scale, they either lack savings entirely – think gig workers – or they disproportionately hold short-term savings and real estate wealth – think entrepreneurs.

Access to pensions

The real question is this: if the total aggregate wealth of the self-employed is similar to that of employees, why do they prefer other types of investments to pensions and what can we do about it?

A key practical issue is that, unlike employees, there is no employer to automatically enroll the self-employed into a pension.

Also, the success of self-enrollment has a lot to do with the inertia element of behavioral economics to keep people in the program, in other words, the trust that most people won’t be able to. just not withdraw.