With a December election on the cards, many commentators are hoping that pensions will be in the spotlight and that the Government will finally tackle the problem of self-employed workers not saving for the future.
Among those trying to woo self-employed workers into saving for retirement is newly launched provider Penfold. The service hopes to encourage new savers by letting people start an acount with as little as £10. Backed by venture capital and angel investors, the savings tool has recently been authorised by the Financial Conduct Authority and is a member of the Financial Services Compensation Scheme.
While the launch of auto-enrolment has led to a significant surge in the number of UK workers saving into a pension, there are widespread concerns about the growing army of self-employed workers in the UK.
Tom Selby, pensions analyst at AJ Bell, says: "The lack of saving among self-employed people is a real problem in the UK and there is a real risk they will end up in serious difficult in later life unless measures are introduced urgently."
Under auto-enrolment, employees are automatically put into their workplace pension scheme as long as they are at least 22 years old and earning at least £10,000.
It is estimated that 87% of workers are now saving into a pension scheme, up from 55% of workers in 2012. A hefty £90 billion was saved into workplace pension schemes in 2018, up from £16.9 billion in 2012.
But auto-enrolment does not apply to the almost 5 million self-employed workers in the UK and there are fears that many of these people are dangerously underprepared for retirement.
Indeed, recent figures from HMRC found that the trend among these workers is actually moving in the opposite direction – with the number of self-employed people saving into a pension falling from 600,000 in 2013/14 to just 410,000 2017/18 – that’s despite a significant increase into the number of people who are self-employed. Total pension contributions for these workers was £1.6 billion in 2017/18, down from £2 billion two years before.
Helen Morrissey, pension specialist at Royal London, says: “This group are particularly vulnerable when it comes to planning for retirement. The government can no longer ignore the needs of almost 5 million people and it must look at how to bring the self-employed into the auto-enrolment regime so they can safeguard their future by saving into a pension.”
There has been much speculation about how to encourage self-employed workers to save for retirement, including expanding auto-enrolment to include these workers by making it part of the annual self-assessment tax return forms.
Extending Auto-Enrolment
Auto-enrolment has been so successful among employees because it is done automatically, with no input necessary to start saving as contributions are deducted directly from your salary. Self-employed workers, on the other, must set up their own pension scheme, research their own investments and, crucially, do not receive contributions from an employer to help top up their savings pot.
Penfold estimates that around 86% of the UK’s self-employer workforce do not save into a pension. Its service, which can be used online or through a smartphone, will charge savers 0.8% a year for a basic plan including Penfold's 0.58% platform fee. The basic plan invests in the Vanguard Life Strategy funds – ready-made portfolios of tracker funds designed for different risk levels. There may also be an additional charge of up to 0.06% for transaction costs.
For those at the point of accessing their retirement savings, Penfold charges £125 plus VAT a year for those in flexible drawdown, and £75 plus VAT for those purchasing an annuity.
Pete Hykin, co-founder of Penfold, says: “We know that auto-enrolment has increased participation in pensions to 80% amongst the employed, but this hasn’t helped the millions of UK self-employed. It’s as though the self-employed, who we know are the backbone of the economy, are being ignored by the government and UK industry.”
But Selby says savers could be better off setting up a self-invested personal pension (Sipp) or using a scheme such as the Government's Nest. He is concerned about Penfold's charges - its 0.58% platform fee is "among the very highest in the market". Charges are a crucial consideration when saving for the long-term as they eat into your returns significantly, reducing the ability of your money to grow.
Someone for saves £1,000 a year for 20 years and enjoys annual returns of 5% would end up with £32,690 with annual charges of 0.8%. If the annual fee was reduced to 0.5%, they would get £1,100 more.
"Particularly when you consider that the underlying investments are passive funds so should in theory be very low cost. Any investor considering this service needs to be clear what they are getting in return for that extra cost," adds Selby.
Pensions are expected to be a target for any Government in the event of a General Election, with many industry commentators calling for the complicated tax rules around pensions to be simplified. Already the Pensions and Lifetime Savings Association has launched a tool designed to help people understand how much they need to save to afford the lifestyle they want in retirement.
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