HMRC and financial service firms should be allowed to provide people with personalised ‘nudges’ to encourage retirement saving, the Social Market Foundation (SMF) has said, as it urged the government to "stop ignoring the self-employed pension crisis".

A survey of 1,000 self-employed workers in the UK from Monzo, which also commissioned the SMFs report, showed that, currently, only 20 per cent of self-employed workers participate in a pension scheme, compared to 78 per cent of employees.

Of those who do regularly contribute to personal pension schemes, 31 per cent contribute the same amount each month, which is again in contrast with employees, who typically contribute a percentage of earnings each month, so their pension contributions rise as earnings do.

The research also found that 30 per cent of self-employed people surveyed contribute to their pension less frequently than once a month, while 10 per cent contribute less than once a year.

The most common reason cited for not contributing regularly to a pension scheme is that self-employed workers believe they ‘can’t afford to’.

However, the SMF argued that affordability is "clearly not the whole story", pointing out that an employee at the same income level as a self-employed person is still much more likely to save into a pension.

In particular, the SMF said that awareness and understanding of pensions knowledge could also play a role, as its analysis found that nearly two-thirds of respondents reported that they either ‘don’t really understand’ or only ‘have a basic understanding’ of pensions.

Participants on lower incomes were also more likely to save spare cash at the end of the month in an instant-access savings account than other options, reflecting an aversion to ‘locking away’ savings.

However, the main issue, according to the report, is that, unlike employees with auto-enrolment, there remains no specific mechanism to encourage self-employed workers to adequately save for retirement.

This has meant that the savings gap between the self-employed and employees has widened sharply since the introduction of the auto-enrolment policy.

Given this, the think tank argued that there is currently a gap in the market for supporting self-employed workers to invest in their future, noting that whilst some use financial advisors to help with retirement planning, this is often only accessible to the wealthiest self-employed workers.

It also warned that generic financial advice can prove complex or irrelevant, and has limited ability to encourage investment.

Whilst the SMF agreed that the planned reforms to the ‘advice/guidance’ boundary, including proposals for ‘Targeted Support’ will help to address this issue, it argued that more can be done, particularly given the recent revival of the Pensions Commission.

Indeed, improving self-employed pension saving levels is expected to be a key focus for the Pension Commission, which has been tasked with looking into why tomorrow’s pensioners are on track to be poorer than today’s.

According to the SMF, this is very much needed, as whilst self-employment is now a considerable part of the economy, pensions policy has yet to catch up.

Given this, the think tank urged the government to fast-track the proposals to enable firms to offer targeted support, by, for instance, resourcing the FCA gateway approving these activities to operate at pace.

Looking further ahead, it encouraged the government to consider ways to enable private sector firms to incorporate opt-out interventions in customer engagement to increase participation.

In addition to this, it called on the government to work with HMRC and software providers to integrate nudges into self-assessment tax forms, including an “active choice” or opt-out auto-enrolment for pension contributions.

SMF researcher, John Asthana Gibson, said: "The low rates of pension saving by self-employed workers should be a huge cause for concern for policymakers.

"If trends continue, large numbers of Britain’s entrepreneurs will struggle to live to the standards they rightly expect in retirement.

"It’s simply untenable for the government to continue to overlook this problem. We should build on the success of auto-enrolment for employees and ensure that people in this crucial but often forgotten part of the labour force are encouraged to sufficiently save for their retirement”.

Adding to this, Monzo group policy director, James Shafe, said: “We welcome the government’s Pensions Review and its focus on ensuring everyone saves enough for retirement.

"Crucially, this must tackle the widening gap between the employees and the self-employed. The 4 million self-employed workers in the UK are the backbone of our economy, yet they’re at most risk of being left behind when it comes to saving for retirement."

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