Self-employed 'need a nudge on pensions'

A practical solution to the perceived ‘problem’ of pensions for freelancers and other self-employed people has been tabled in a new report.

Royal London, a mutual, says a substantial “nudge” to such workers needs to be given in the shape of a higher rate of Class 4 NICs, such as setting them at 12%, up from 9% currently.

But rather than the additional contribution being retained by the government, the idea is that freelancers would be able to opt to have that money diverted to a pension or Lifetime ISA.

The only caveat is that the freelancer would have to make their own direct contribution of at least 5%, taking the total combined contribution to 8% - the minimum under auto enrolment.

“Whilst self-employed people would not be forced to take out a pension, this would be the only way they could benefit from the additional 3% of NICs that they had paid in,” said Royal London.

“This is very similar to the way in which employed earners can only get a 3% employer contribution if they stay enrolled in a workplace pension – if they opt out, the employer contribution stops.”

The mutual says an estimated 3million self-employed people would be covered by its proposal, which it projects will add 2million to the number of self-employed pension savers.

Former pensions minister Steve Webb, who now directs policy at Royal London, believes the government must take action now amid membership of pension schemes among the self-employed being at “crisis levels.”

He said: “Using the existing National Insurance system to mirror the process of automatic enrolment is the best way of giving self-employed people a ‘nudge’ to start saving for a pension.

“In addition, because self-employed NICs are linked to profits, contributions would automatically go up in good years and down in poor years. Without action, millions of self-employed people could face poverty in old age.”

 

5th May 2016

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