IFS - A quarter of the self-employed who save in a pension keep cash contributions the same for at least a decade

From: Think Tanks
Published: Fri Mar 03 2023

Many of the self-employed who save into a private pension rarely change the cash contributions they make.

Employees' pension contributions tend to be set as a fraction of their earnings - and so cash contributions rise with earnings. But many of the self-employed who save into a private pension rarely change the cash contributions they make. Nearly half of those saving in two consecutive years stick with exactly the same amount, and 23% are still saving the same cash-terms amount nine years later.

These findings are particularly worrying in the current high-inflation environment. Even with annual inflation at 2%, the real value of contributions that are constant in cash terms would fall by nearly 20% over a period of 10 years. But with current high inflation rates, the real-terms fall is now far larger.

These are some of the key findings of new IFS research, funded by the Nuffield Foundation, launched in advance of next week's event, What drives how much workers are saving in their pensions?'.

The challenge of pension contributions that remain flat in cash terms comes on top of the fact that less than 20% of the self-employed are saving in a private pension at all, compared with around 80% of private sector employees.

Other key findings about the pension saving of the self-employed include:

  • Nearly a quarter of the long-term self-employed workers who are saving in a pension choose the contribution amount as a monthly or annual round number' in nominal pound terms (e.g. 10/20/50/100 per month). The most common single amount among savers is 50 per month (or 600 per year).
  • Those who save a round number' amount - presumably having set up a direct debit for that amount - are particularly likely to leave their cash-terms contributions unchanged over many years. Out of the round number' savers who are still saving a decade later, 60% are saving the same cash amount.
  • While self-employed people earning between 10,000 and 20,000 per year have average pension contributions similar to those of employees with defined contribution schemes, for those earning above 20,000 per year the self-employed who save in a pension contribute substantially less than similarly paid employees.

Heidi Karjalainen, a Research Economist at IFS and author of the report, said:

"The very low level of private pension participation among the self-employed has, rightly, led to a huge amount of policy concern from the government. But with so many self-employed savers' pension contributions not rising in line with either inflation or earnings, it is clear that solving the problem of participation alone is not enough to ensure the adequacy of future pension incomes for self-employed workers."

Jonathan Cribb, Associate Director at IFS and another author of the report, said:

"A form of auto-escalation could be a good way to boost pension saving by the self-employed - for example, using a direct debit that increased in line with inflation, or at another pre-set rate. This would help to ensure that contributions do not fall in real terms over time."

Company: Think Tanks

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