Pension saving plummets when employees move into self-employment, a new report has found.
A report by the Institute for Fiscal Studies found that only around one in five self-employed workers save into a private pension, compared with around four in five employees.
The think tank said the findings highlight an urgent need for policies addressing low pension participation among the self-employed. It said a key potential moment for such policies is the point at which employees move into self-employment.
According to the report, younger workers who move into self-employment were found to be much less likely to continue saving in a private pension than older workers. In the first year after moving into self-employment, only 13% of workers aged 30 or under save in a pension, compared with around 26% of workers aged 31 or over.
The report also found differences between whether the worker becomes a partner or a sole trader, as well as their previous level of earnings. In the first year after becoming self-employed, almost half of partners save in a private pension compared with less than 20% of sole traders.
Similarly, workers in the top third of the earnings distribution as an employee are over twice as likely to continue saving when self-employed as workers in the bottom third of the distribution.
The IFS pointed out that the lack of automatic enrolment for the self-employed means that it is much more hassle for them to save in a pension than for employees. As such, it said a good starting point for reform would be policies to make pension saving easier for the self-employed, such as integrating pension saving into either tax returns or business software.
Laurence O’Brien, senior research economist at IFS, said: “Boosting private pension saving among the self-employed is becoming an urgent challenge for policymakers. One moment to target is the point when workers move from an employee job into self-employment.
“Ideally, policies could make it easier for these workers to continue saving in the workplace pension pot they had with their previous employer. For example, employers or pension providers could potentially be required to provide more details on how to continue saving in the same pension pot when employees leave their job.”
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