A new All Party Parliamentary Group (APGG) published a report of ‘Financial Resilience’ has found that a quarter (24%) of working age adults (18-64 years old) did not save any money during the pandemic sparking major concerns about financial insecurity both today and in retirement.
In particular, the report focuses on the self-employed and workplace pensions.
Self Employed Less National Insurance Contributions
Historically, employees have always paid more national insurance contributions that than the self employed and when combined with employers’ national insurance contributions, the gap is even wider. This meant that employees had wider access to higher benefits such as statutory sick pay, statutory maternity pay, and a second-tier state pension known as SERPS (State Earnings Related Pension Scheme) latterly known as the State Second Pension (S2P). S2P has now gone with the replacement being a larger New State Pension rather than the old Basic State Pension plus SERPS.
Workplace pension laws started in 2012 for larger employers requiring all employers to have a workplace pension and automatically enrol eligible employees into it. This was gradually introduced to the smaller employers on a sliding scale to the point where all employers (including Self Employed employers) must now offer a workplace pension. Current contribution rates are a minimum 3% employer and 5% (including tax relief) for employees of relevant earnings above a minimum threshold. Self employed people are not subject to workplace pension rules for themselves but are for their employees.
In its Financial Resilience Report, the APGG suggests:
Employees: Age threshold should be reduced to 18 to encourage earlier retirement savings. The earnings threshold at which employees become eligible and be auto enrolled into the pension scheme should be lowered, thereby ‘catching’ more employees. A system should be introduced to ‘catch’ employees that perhaps have two jobs, each employment income below the threshold e.g., £5,100 for each job meaning employees with two jobs not being auto-enrolled in either scheme whereas if they had one job earning £10,200, they would have been auto-enrolled into the workplace pension.
Self Employed: A new system should be introduced, possible via Self Assessment, where a self-employed person is auto enrolled in a workplace pension scheme when declaring earnings via self assessment returns and income being above the lower level of qualifying earnings. This would mean that self employed would, by default, be required to plan for retirement in the same way that employees do.
We believe these proposals are much needed, and we suggest it will be much easier to ‘police’ self employed workplace pensions when Making Tax Digital (MTD) is introduced for both the Self Employed and Landlords and in April 2024.