Key facts
- One in five self-employed individuals in the UK contribute to private pensions, compared to four in five employees.
- Over three-quarters of workers stop pension contributions when transitioning to self-employment.
- Younger self-employed workers (under 30) show the lowest pension saving rates.
- Lower earners (£36,500 or less) have significantly reduced pension contributions after becoming self-employed.
- The Pensions Commission has identified boosting self-employed pension savings as an urgent policy challenge.
Self-employed individuals in the UK face significant risks to their retirement savings due to low pension contribution rates, according to findings from the Institute for Fiscal Studies (IFS). The research indicates that approximately one in five self-employed workers contribute to a private pension, a stark contrast to the four in five employees who do.
This decline in savings engagement is particularly acute for those transitioning from employment to self-employment, with over three-quarters halting their pension contributions. Factors contributing to this trend include irregular earnings, the absence of the auto-enrolment safety net, and difficulties in separating personal and business finances.
The issue is most pronounced among younger workers; only 13% of those under 30 save into a pension in their first year of self-employment, rising to 24% by the fifth year, but still lagging behind older demographics. Lower earners, specifically those making less than £36,500 annually, also show diminished participation, falling below 20%, while nearly 40% of higher earners continue to contribute. For those earning below £36,500, pension contribution rates can drop from around 7% to just 2% of earnings after becoming self-employed.
Industry experts and the revitalised Pensions Commission have flagged this as an urgent policy challenge. Laurence O’Brien, a senior research economist at the IFS, highlighted the critical juncture when workers move from employment to self-employment. He suggested that policies could be developed to make it easier for these individuals to maintain contributions to their previous workplace pension pots, potentially through requirements for employers or pension providers to offer clearer guidance on continuing savings.