Proposal for new pension fund for self employed

A new self-employment pension should be created through the tax system, with the government paying a bonus of three per cent of earnings to everyone who saves five per cent themselves, according to a new report.

The Good Pensions for All report by the left-leaning Fabian Society think tank says the proportion of self employed workers saving into a pension fell by two thirds from 1998 to 2018 – from 48 per cent to 16 per cent.

It also calls for a gradual increase in the minimum contribution for auto-enrolment pensions to 12 per cent of total earnings, mainly by raising employer contributions and other changes.

It says that the changes are needed as only 19 per cent of workers and one per cent of low-earning workers are saving enough each year to be on track to achieve what the public thinks is a minimum acceptable retirement income (excluding workers with defined benefit pensions). It calculates that low earners in their 20s today need to save at least 11 per cent of earnings across the whole of working life to achieve an acceptable minimum income, while middle and high earners need to save a still greater percentage to achieve a standard of living that reflects their lifetime earnings.

It also points out that women reaching retirement today have one third of the private pension assets of men and that a growing number of people who are approaching retirement are renting, meaning they will have ongoing rental costs in retirement: 30 per cent of households headed by a 45 to 64-year-old are renters, compared to 20 per cent of households headed by someone aged 65 and over.

And it says tax relief currently favours the better off, with at least 51 per cent of the value of pension tax breaks (£27.6bn per year) going to higher or additional rate taxpayers who make up just 4 million out of 28 million employees.

The report says a  retirement income for life should be available to all as the norm and that there should be support for everyone to save enough to meet their future financial needs in addition to fair, affordable and effective social security and tax policies.

While it says the auto-enrolment policy, brought in by Labour, has been a great success, major challenges remain, such as the renting issue, rising inflation and increased poverty as well as the impact of deregulation on the way retirement funds can be accessed. It states that most people with defined contribution pensions are not saving enough to meet their needs in retirement and that important groups are excluded from automatic pensions altogether, including the self-employed, very low earners and people not working while caring. It states: “This has a disproportionate impact on women, disabled people and people from many minority ethnic backgrounds.”

Other recommendations include:

• Introducing a change in how people access defined contribution pensions at retirement by automatically consolidating small and medium-sized pension funds into a single pot; and by ensuring that most people enter a whole-of-retirement pension plan, including an income for life which will normally rise with inflation.
• Encouraging large employers who would have once offered defined benefit pensions to adopt new collective pensions which do not involve them having ongoing financial liability (ie ‘collective defined contribution’ pensions).
• Supporting and incentivising individuals and employers to contribute beyond minimum contribution rates – to pensions and also to payroll saving schemes for low earners.
• Developing new measures to reduce the private pensions gender gap – especially by introducing new credits for parents and carers with zero or very low earnings.
•  Improving the generosity of social security for people aged 60 to 65 with a pension; and for people over state pension age who rent their home.
• Considering whether to reform pensions tax relief to make the system fairer and cheaper.

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