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Gig economy hides gigantic pension problem

Updated 22 December 2022

3min read

Nick Green
Financial Journalist

Nearly half of the UK’s self-employed workers may have to rely on just the State Pension in retirement – which a recent report has found to be the ‘least generous’ in the developed world. As the gig economy grows, a potential pensions time bomb is growing with it. Article by Nick Green.

How much do you have in private pension savings? New data from the Office of National Statistics (ONS) reveals that a staggering 45 per cent of self-employed workers aged between 35 and 55 have none at all. Self-employed people make up around 15 per cent of the UK’s workforce, or 4.8 million individuals, a number that has soared with the growth of the ‘gig economy’. However, pension saving among this workforce has plummeted, from 40 per cent in 2008 to just 25 per cent today. The number of those with no pension savings is therefore likely to rise further in the future.

Why aren’t the self-employed saving?

There are several possible explanations for this drop in pension saving among the self-employed. One is simply wealth levels – individuals who live from hand to mouth may be unable to think about saving for the future. However, this is at best a partial explanation, as the ONS findings show little material difference between the average wealth of self-employed people and those in employment.

The most likely reason is that there is still no equivalent of auto-enrolment for the self-employed. Auto-enrolment means that everyone in employment (within certain criteria) is enrolled in a workplace pension scheme. By contrast, self-employed people must make an active decision to enrol in a private pension scheme. The lack of pension saving among this workforce may therefore be a simple case of ‘never getting round to it’.

Setting up a pension isn’t costly or difficult (though financial advice at this stage can be very rewarding in the long term). But people may be slow to take even this simple step if they don’t appreciate the need for a private pension. It is possible that many self-employed people intend to continue working until they qualify for the State Pension – but as other recent findings show, that may not be a realistic option.

Too much trust in the State Pension?

The Organisation for Economic Co-operation and Development (OECD) has produced a global pensions league table, which shows that the UK State Pension is the least generous in the developed world, relative to average earnings. The UK Basic State Pension pays only 29 per cent of average earnings, behind countries such as Poland, Mexico and Chile (for comparison the USA pays 49 per cent). The New State Pension (available to those reaching pensionable age after 6 April 2016) is a little better, at 38 per cent, but this still puts the UK behind all developed nations except Mexico.

The small size of the UK State Pension is only one of two major problems with it. The other issue is when you qualify to receive it. State Pension age in the UK is increasing; now 65 for both men and women, it is scheduled to rise further in the future. The government actuary suggests that workers currently in their 20s will not receive their State Pension until they hit 70. Furthermore, it’s a matter of speculation as to how much the State Pension will be worth by the 2050s – but it’s reasonable to suppose that it won’t be higher.

How to set up your self-employed pension

If three in four self-employed people are neglecting to save into a pension, that translates to around 3.5 million people currently in work who will retire with only the State Pension to support them. The ONS does reveal that the self-employed have more in the way of property wealth (27 per cent of those aged 35 to 54 have property wealth of £250,000+, compared to 17.6 per cent of employees), but most advisers agree that property alone can’t compensate for the lack of a pension.

So if you’re self-employed and still without any pension savings, what are your options? A personal pension is easy to set up, and may be flexible enough to allow you to vary your contributions if your income fluctuates. Alternatively you could join the government’s own scheme, NEST. For more about getting started, check out our seven pension tips for the self-employed.

The most important tip is to act now, and don’t wait – because old age will come whether you prepare for it or not, and every day of delay is money lost. Talk to a financial adviser about getting some plans in place, because it’s never too soon.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.