According to the data, on average self-employed workers aged 25 to 34 who were not currently saving into a pension and were in the third quartile of earnings (£22,200- £39,000) would need to save nine per cent of their income to hit their replacement rate target.
This was compared to 18 per cent of those in their 50s and in the same earnings quartile.
The IFS felt it was important to note that the self-employed accumulated wealth in other forms other than pensions.
“For those in their 50s, we find that including non-main-property wealth, financial wealth and business assets as sources of retirement income leads to 20 per cent more of the self-employed being on track to hit their target replacement rate,” it added.
The IFS concluded that the way in which self-employed people have to arrange their own pension plans without assistance, was “no longer fit for purpose.”
Reform options
The IFS suggested policymakers choose between two options for reform, the first being 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,” it explained.
The second option was to have a form of auto-enrolment, operationalised through the self-assessment tax return, with HMRC selecting a pension provider if no decision was made by the individual.
“As defaults can be powerful, this should be limited to those with self-employment income above a certain trigger, perhaps set at the level of the equivalent trigger for employees or at the level of the new state pension.
“Default contributions could be introduced at a moderate level and increase over time to equal the default total contributions for an employee with the equivalent level of earnings. A straightforward way to opt out should be available for those who do not wish to make a pension contribution.
“Those declaring to be already making pension contributions on their self-assessment form could either be not enrolled or be enrolled with contributions equal to the default level minus their declared contributions. An option to instead divert savings to a Lifetime ISA could also be introduced,” the IFS said.
It also felt that to help self-employed people who were saving in a private pension to save a more appropriate amount, the defaults on direct debit contributions should be changed.
alina.khan@ft.com
