Two businesses have recently come together to create a recommendation for self-employed pensions.
The collaboration between Aviva and Royal London comes after the release of recent data on self-employed pensions; it showed that pension contributions were made by only 1 in 7 during 2015/15.
The proposed solution involves the default of the self-employed into pension saving through the yearly self-assessment process. Those who are self-employed would nominate a scheme or pension provider as part of their annual tax return in order to receive a contribution. An amount would then be added to their bill automatically, potentially equivalent to 4% of taxable profits.
Therefore, unless the self-employed person opted out of this process, standard rate tax relief would mean that 5% of their profits would go into a pension.
One of the key benefits of this option would be the flexibility of the amount contributed. Rather than a fixed proportion, it would simply move in line with the business profits during that particular month.
Commenting on the pressing need for the auto-enrolment scheme was John Lawson of Aviva. He drew attention to potential consequences if no action is taken, stating: “The lack of retirement provision amongst the self-employed is reaching crisis levels. Whilst automatic enrolment has helped to reverse declining participation amongst employees, the situation for self-employed workers remains dire. Many will simply be unable to afford to retire unless urgent action is taken.”
Steve Webb also highlighted the potential impact that the process could have on saving habits. The director of policy at Royal London stated: “Automatic enrolment has shown the power of ‘nudges’ to get people saving. Using the annual tax return process to ‘nudge’ self-employed people into starting saving for their retirement could bring a breakthrough in pension coverage for the self-employed in the same way as has already happened for employees. It is vital that we build on the momentum for action in this area and take forward practical proposals as a matter of urgency.”
