Employees’ pension contributions tend to be set as a fraction of
their earnings – and so cash contributions rise with earnings.
But many of the self-employed who save into a private
pension rarely change the cash contributions
they make. Nearly half of those saving in two
consecutive years stick with exactly the same amount, and
23% are still saving the same cash-terms amount nine
years later.
These findings are particularly worrying in the current
high-inflation environment. Even with annual inflation
at 2%, the real value of contributions that are constant in cash
terms would fall by nearly 20% over a period of 10 years. But
with current high inflation rates, the real-terms fall is now far
larger.
These are some of the key findings of
new IFS research, funded by the Nuffield Foundation,
launched in advance of next week’s event, ‘What drives how much workers are
saving in their pensions?'.
The challenge of pension contributions that remain flat in cash
terms comes on top of the fact that less than 20% of the
self-employed are saving in a private pension at all, compared
with around 80% of private sector employees.
Other key findings about the pension saving of the
self-employed include:
- Nearly a quarter of the long-term self-employed workers who
are saving in a pension choose the contribution amount as a
monthly or annual ‘round number’ in nominal pound terms (e.g.
£10/£20/£50/£100 per month). The most common single
amount among savers is £50 per month (or £600 per year).
-
Those who save a ‘round number’ amount – presumably
having set up a direct debit for that amount – are particularly
likely to leave their cash-terms contributions unchanged over
many years. Out of the ‘round number’ savers who are
still saving a decade later, 60% are saving the same cash
amount.
- While self-employed people earning between £10,000 and
£20,000 per year have average pension contributions similar to
those of employees with defined contribution schemes, for
those earning above £20,000 per year the self-employed who save
in a pension contribute substantially less than similarly paid
employees.
Heidi Karjalainen, a Research Economist at IFS and author
of the report, said:
‘The very low level of private pension participation among the
self-employed has, rightly, led to a huge amount of policy
concern from the government. But with so many self-employed
savers’ pension contributions not rising in line with either
inflation or earnings, it is clear that solving the problem of
participation alone is not enough to ensure the adequacy of
future pension incomes for self-employed workers.’
Jonathan Cribb, Associate Director at IFS and another
author of the report, said
‘A form of auto-escalation could be a good way to boost pension
saving by the self-employed – for example, using a direct debit
that increased in line with inflation, or at another pre-set
rate. This would help to ensure that contributions do not fall in
real terms over time.’
ENDS
Notes to Editor
'Understanding pension saving among the self-employed '
is a report by Jonathan Cribb and Heidi Karjalainen.
