Less than a fifth of the self-employed are saving into a pension, even among those better off, new research reveals

Freelancers, contractors and the self-employed could face a pension crisis after it emerged that fewer than one in five are saving into one. 

The proportion of the working-age self-employed that are saving into a private pension has declined dramatically over the last two decades, from 48 per cent in 1998 to just 16 per cent in 2018, according to the Institute of Fiscal Studies (IFS).

This suggests there are more than 3.5 million working-age self-employed people who are not saving into a pension today in the UK. The survey also found that the sharpest fall in pension savings came from those who had been self-employed for longer and with higher income.

Affordability top reason for fall in pension saving

Almost 70 per cent of self-employed workers earning more than £500 per week were saving into a pension in 1998-99, compared to just 24 per cent in 2018-19. And 60 per cent of those surveyed who had been self-employed for seven years or more were saving into a pension until 1998-99, whereas in 2018-19 this was just 23 per cent.

Survey respondents explained that affordability was the main reason for not saving into a pension fund. Other reasons cited included a lack of trust in pension firms and understanding how pensions work. Some respondents also said they had alternative ways of saving for retirement, such as investing in property.

The research, which was funded by the IFS Retirement Savings Consortium and the Economic and Social Research Council, drew upon data from the Family Resources Survey and the Wealth and Assets Survey.

There is a real concern among policymakers as fewer and fewer self-employed save into a pension, despite the significant rise in the number of people in the workforce during the same period. And the COVID-19 crisis has only exasperated this.

COVID-19 to make saving more challenging

It has been said that the lack of government support available to many freelancers and contractors has increased financial pressure on this group and could make pension saving even more challenging.

Heidi Karjalainen, research economist at IFS and co-author of the report, said: “Particularly concerning are the huge declines in participation among the more long-term and more well off self-employed. 

“These are groups who will particularly need to save privately for retirement on top of the state pension to avoid falls in their standard of living when they stop work. […] Policymakers are right to be concerned about these trends and to be considering how to make it easier – and to encourage – the self-employed to save more.”  

Mike Cherry, chair at the Federation of Small Businesses, told This is Money: “IFS’s research highlights yet another area where the self-employed don’t enjoy the same benefits as employees. If you’re a member of staff, there’s some real legislative protection there. If you’re self-employed, you’re on your own. It’s important that our tax system fairly reflects these discrepancies.