The government has been urged to take action to help self-employed workers better prepare for retirement, after research from the Institute for Fiscal Studies (IFS) found that the current policy environment is "not fit for purpose".

The report, in partnership with the Abrdn Financial Fairness Trust, showed that the level of pension participation amongst the self-employed has fallen “dramatically” over the past 25 years, "collapsing" from 60 per cent in 1998 to 20 per cent since 2013.

And pension participation for the self-employed has remained stuck at "very low levels" in the decade since, with 20 per cent of self-employed workers earning over £10,000 saving in a private pension, compared to 80 per cent of employees earning over £10,000.

In total, more than half (52 per cent) of the self-employed have accumulated absolutely no private pension savings to date.

The IFS also pointed out that, even among those self-employed who do save in a private pension, many get stuck making the same cash contributions year after year, with inflation eroding the real value of these contributions over time.

In addition to this, new modelling from the IFS showed that the majority of the self-employed face inadequate retirement incomes if relying only on their own pensions.

Whilst the IFS admitted that a partner’s pension, an inheritance or other savings may fill the gap for some, it warned that even if the projected pension incomes of partners, inheritances and other savings are fully used to bolster retirement incomes, a "substantial minority" of the self-employed would still fall short of commonly used benchmarks of retirement saving adequacy.

The report also found that, despite having lower levels of earnings, self-employed workers have similar levels of wealth to private sector employees who are not currently saving into defined benefit pensions.

However, the self-employed hold less of their wealth in pensions and more in housing, businesses and other savings.

But whilst the IFS acknowledged that many self-employed workers save for retirement in other ways, it argued that it is “striking” that successive governments have put in place structures, such as automatic enrolment, to make it much easier for employees to save in a pension scheme, but have not facilitated anything like the same assistance for the self-employed.

Given this, it encouraged policymakers to pursue one of two options to make it easier for the self-employed to save into a pension, both of which build on the fact that self-employed people have to fill in a tax return at the end of each year.

One option outlined by the report was to require all self-employed individuals filling out a self-assessment tax return to make an active choice about the level of pension contributions to make at that point (with zero being an option).

Any contributions made would then go into either a nominated private pension plan, a government-chosen default pension plan or a lifetime ISA, with the IFS stating that, based on previous evidence, it was "confident" that this would boost pension saving.

A second option would be to introduce a form of automatic enrolment, again administered at the point of self-assessment.

Unless choosing to opt out, a default level of contributions would be paid into a pension, or lifetime ISA, with default contributions set at a "moderate" level and increased over time to the equivalent default total contributions for an employee.

This, according to the IFS, could be expected to deliver a more substantial increase in pension participation than the first option and would be an appropriate choice for policymakers particularly concerned by the trends in pension saving among the self-employed.

The report also suggested that, to help self-employed people who are saving in a private pension contribute a more appropriate amount over time, the defaults on direct debit contributions should be changed so that they increase automatically, for example, in line with inflation.

IFS senior research economist, David Sturrock, said: “Policymakers have two key options to help the self-employed save for retirement. Both build on the fact that self-employed people have to fill in a tax return at the end of each year.

“Using that system, the government could either get the self-employed to make an active choice over whether to save into a pension or lifetime ISA, or enrol them automatically into a long-term savings plan, which they could opt out of.

“Either way would reduce the hassle cost that self-employed people face when looking to save for retirement.”

Adding to this, Abrdn Financial Fairness Trust, Mubin Haq, said: “The self-employed make up an increasing share of the UK’s workforce but far too many are on track to have a poor retirement. More than half have no private pensions savings.

“Auto-enrolment was a sea-change for employees, rapidly increasing the numbers saving into a pension. We now need to use similar methods for the self-employed to actively nudge them into thinking about their financial futures.

“Changes to retirement savings take a long time to bear fruit so there is an urgency to ensuring action is taken sooner rather than later.”

The call for action was also welcomed by broader industry organisations, as Pensions and Lifetime Savings Association (PLSA) chief policy counsel, Nigel Peaple, highlighted the proposed options as "an important contribution to the debate on how to improve retirement outcomes for this under-pensioned group".

"The PLSA has long called for automatic enrolment, or something similar, to be provided for self-employed workers," he continued.

“If it can be made to work, the self-assessment tax return process has the potential to provide an effective way to empower people to take control of their retirement saving.

"Many self-employed workers have highly fluctuating incomes so it’s important they retain a degree of flexibility over how much they save while having a simple and regular reminder to contribute more. Workplace-style pension funds, with their low charges and member-focussed governance, are a good fit for self-employed workers.”

Adding to this, Standard Life retirement savings director, Mike Ambery, said: "The issue of pensions adequacy is in the spotlight and the self-employed are an often overlooked group when it comes to pension policy, which overwhelmingly focuses on saving through an employer.

"As today’s report points out, the long-term outlook for the self-employed is a source of concern and finding interventions that prompt people to make active decisions about their level of savings is to be welcomed.

"The path to retirement for the self-employed will often look very different to that of employees, and ensuring their needs and circumstances are taken account of will be an important element of the government’s pension adequacy review later this year.”

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