In line with our risk management framework, today we published our Q4 2019 performance update.
Is a pension black hole looming for the self-employed?
The issue of self-employed workers has been something of a political football in the past. A number of reviews and consultations have been launched with respect to rights and responsibilities relating to the self-employed, while last year’s Spring Budget came in for major controversy as it sought to increase their National Insurance Contributions.
However, it is the so-called ‘gig’ economy which has attracted the most scrutiny in recent times, with criticisms and suggestions of employer exploitation rife within parliament and beyond. And new data released by the Office for National Statistics (ONS) last week has shone the light on a new problem: private pensions – or lack thereof – for those working within the gig economy.
So, is a major shortfall in retirement savings set to strike Britain as a result? Let’s first clarify exactly what the gig economy is, and why it has been thrust into such sharp focus…
What is the ‘gig’ economy?
The ‘gig’ economy is a term coined to describe a labour market characterised by short-term (or even zero-hour) contracts, along with freelance work – rather than roles falling under permanent employment. Common examples are food delivery drivers, ride-hailing drivers, couriers and more.
In Britain, this marketplace has grown in prevalence, with around 5 million workers now falling within the self-employed bracket. That means around one in six workers in this country are not tied to a permanent working agreement - which represents a marked increase from the corresponding figure of 12 per cent in 2001 – and it is believed that the gig economy has played a significant role in this increase.
Yet despite its seeming popularity, the rise of the gig economy has divided opinion. Advocates point out that many of these jobs allow workers to choose their hours (to a large extent anyway), providing them unique flexibility to work to a schedule that suits them. Added to that, it is argued that this form of arrangement promotes efficiency and productivity, and delivers dynamism to the economy as job descriptions and employer demands shift in a fast-moving world.
The counter-argument, of course, is that these workers have a complete lack of job security; enjoy little or no workplace protections, and are therefore vulnerable to employer exploitation.
A pension-saving shortfall
Whichever way you align within the debate, one area of concern is that of retirement planning on the part of these workers. The ONS found that just a quarter of the self-employed are presently contributing towards a private pension, compared with 40 per cent a decade ago.
A staggering 45 per cent between the age of 35 and 55 have no private pension. By comparison, just 16 per cent of employed workers in this age bracket have no pension. It doesn’t get much better for those nearing retirement either, with nearly a third of self-employed men and women over the age of 55 not having a single penny saved within a pension. In contrast, it is believed that the equivalent figure for employed workers in this age group is around 11 per cent.
Why are the self-employed not saving for retirement?
A significant success story within UK pensions has been the recent roll-out of auto-enrolment, whereby employers are obliged to register their employees into a workplace pension, and match their contributions to a certain level. While employees are able to opt out, auto-enrolment is credited with adding nine million individuals to workplace saving within the last five years, which is estimated to be worth £19.7bn in extra annual contributions by 2019-20.
So, should this legislation be extended to the self-employed too? The answer is that it already has. However, of the current set of auto-enrolment rules, there is one in particular which is said to be excluding around 3 million self-employed workers: earning a minimum of £10,000 within a single job. Adding further fuel to the fire is the fact that the majority of those excluded are under the age of 30, and/or are female.
Yet while Government has pledged to review auto-enrolment regulations in an attempt to widen the net, it is understandable why those within the gig economy would not deem a pension to be the right fit, given the lack of security (and quantity) of their incomes over the long-term.
Furthermore, there is some encouragement in respect of asset value for the self-employed, with more than a quarter of those aged 35-54 boasting property wealth in excess of £250,000. This compares favourably with employees, for whom the corresponding figure is just 17.6 percent.
Many self-employed workers also choose to invest in their own businesses, which, in the long run, should yield further asset value, and could be cashed in at the point of retirement.
Still much room for improvement
Yet while the above points do offer some mitigation, there is still no getting away from the fact that many self-employed and gig economy workers could find themselves in severe financial difficulty by the time they reach pensionable age and down tools.
It is incumbent upon Government to deliver creative solutions and mechanisms which can offer equivalent benefits such as auto-enrolment for the self-employed and gig economy workers. It is a fine line between disturbing the fluidity of these roles, and still providing adequate protection. However, the issue of retirement planning within this niche is one which clearly needs to be addressed.
But in the meantime, the onus falls on these workers themselves to plan ahead. Even if a pension doesn’t tick the right boxes, there are numerous other ways and means to build up a nest egg. But as with pensions, investments or saving, the sooner one starts to squirrel money away, the better. Hopefully, the release of such data will raise the alarm sufficiently such that the tide begins to turn, and this growing army of workers, who bring so much to the UK’s economy, will not be caught short in their golden years.
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