Self-employed workers are not saving enough into their pensions, a leading think tank has warned, and risk being left with a shortfall of almost £250,000 in retirement.
While for employees pension savings are typically set as a percentage of their earnings, most self-employed workers rarely increase their contributions, even when their income rises, the Institute for Fiscal Studies found.
Nearly half of self-employed people that do pay into a pension kept their contribution flat for two years in a row. Among those who had saved into a pension for at least nine years, around one in five never increased their contributions. This is in contrast to employees, who see their pension payments rise in line with increases in their salaries.
Pension laws mean typically 8pc of workers’ wages will be earmarked for their pensions, while freelancers have no obligation to save into a pension pot.
The most common cash contribution into the pension pots of the self-employed is just £600 per year, the IFS said.
Such low levels of savings mean that thousands of self-employed workers will fail to build a big enough pot for a moderate lifestyle in retirement.
If a self-employed 22-year-old contributed £600 annually to their pension, and increased this by 2.5pc every nine years, they would have a fund worth just £35,389 in today’s money by the time they reach the age of 68, according to separate calculations from the pension provider Aegon.
That would be £245,000 lower than the private funds needed to fund a moderate retirement, Aegon said.
Steven Cameron, of the firm, added that the self-employed had been left behind by auto-enrolment reforms introduced in 2012. Under these rules, employers are legally obliged to enrol their staff into a pension savings scheme, unless they actively opt out. The minimum default contribution rate is currently set at 8pc on earnings between £6,240 and £50,270, with employees contributing 5pc and employers adding another 3pc.
“The self-employed have not benefited from this and many are falling far behind in their retirement planning,” Mr Cameron said. “Left to their own devices, even those who do save in a pension are often saving far less than is needed for anything close to a comfortable retirement.”
Jonathan Cribb, of the IFS, said that using “auto-escalation” could boost pension saving for 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,” he said.
Self-employed workers earning between £10,000 and £20,000 made similar cash contributions to their pensions compared with people enrolled in typical workplace schemes, the IFS said. But self-employed middle earners were saving “substantially less” than their peers. Those who earned around £45,000 per year contributed 7pc of their income to their pension, versus 11pc among employees.
Last month, the IFS suggested that higher earners should be forced to pay more into their pensions. It found that too few people increased their pension contributions when their earnings rose, with just one in 100 private sector employees doing so when they received a 10pc pay rise.