By: Sophia Dimitriadis

This Pension Awareness Week, I wanted to shine a light on a proportion of the UK population who face particular challenges when financially planning for retirement – self-employed Gen Xers.

Our recent Slipping between the cracks? report, supported by Phoenix Group, found that nearly 1 in 3 members of Generation X (those born between 1965 and 1980) risk facing bleak retirement prospects if policymakers fail to act quickly.

But the self-employed, who comprise around 14% of this generation, may be especially disadvantaged. A quarter have no pension savings and nearly 4 in 10 are barely saving enough to achieve a minimum income in retirement – compared to 19% of employees.

What about non-pension income?

Interestingly, despite this, self-employed Gen Xers are no more likely to expect to rely on the state pension in retirement or be worried about their retirement prospects than employees. They expect to be supported by non-pension related forms of income in retirement – mainly income from property.

This confidence, however, may be unjustified. Self-employed Gen Xers are no more likely than Gen X employees to report having (non-pension) savings or investments for retirement, or to own a home – although they’re more likely to say they’ve paid off their mortgage.

Research from the Institute for Fiscal Studies also found that alongside a decline in pension savings, non-pension savings have fallen among self-employed people since the 1990s, while increases in property wealth among the self-employed have been similar to those seen among employees.

In short – it’s very unlikely that the relatively low pension savings among the self-employed can be compensated for by non-pension income. Many self-employed Gen Xers may be sleep-walking into financial hardship.

Why the self-employed struggle to save for retirement

The majority of self-employed Gen Xers say they want to save more but are struggling to do so.

A key reason for this is many are battling insecure earnings; 44% of this group say they struggle to save for retirement because their income and outgoings are too insecure to save regularly – compared to just 12% of Gen X employees.

The self-employed are also disproportionately more likely to say they can’t afford to save more compared to employees – and are far more likely to say that the main reason for this is they don’t earn enough (78% vs 64%). This isn’t surprising; while the self-employed are a heterogenous group, they earn on average less than the average employee.

Another often overlooked factor affecting affordability is poor health; self-employed Gen Xers are 4 times more likely than employees to say they can’t afford to save more because their health limits their ability to work.

Previous research finds that workers in poor health are often pushed out of employment and into self-employment in order to obtain the flexibility they require – while many often feel insufficiently prepared and supported for this transition.

A key reason why self-employed Gen Xers are nearly five times more likely to report having no pension savings compared to employees (24% vs 5%), which may be due to their inability to overcome the well-known inertia to saving without the support of auto-enrolment. Compared to employees, our self-employed Gen Xers are nine times as likely to say they don’t contribute into a pension because they’re not eligible for a pension scheme or because this is not offered at work (9% vs 1%).

COVID-19 has disproportionately affected self-employed workers

As if all of this wasn’t enough, the economic fallout from COVID-19 has hit the self-employed the hardest. Nearly 4 in 10 self-employed Gen Xers say they’ve had to spend their savings or save less for retirement as a result of the pandemic.

% of Gen Xers who are spending or saving their retirement savings due to the pandemic, by employment/income group

Without additional support– this could significantly hinder this group’s retirement prospects, especially among older members of the cohort. 46% of self-employed Gen Xers plan to work past the State Pension Age to remedy an expected shortfall in retirement income.

Moreover, unemployed workers aged 50 and over are more likely to struggle to find a new job – a phenomenon that has also been observed since COVID, and of particular concern, are subsequently more likely to become disaffected and leave the labour force altogether.

Amid a rise in self-employment among all ages from 2001 to 2017, especially for people aged 45 and over, which is likely to continue as older workers aspire for more flexible work – the need to act to boost this group’s retirement prospects is urgent.

What do we need to do?

1. Expand auto-enrolment to the self-employed – but offer some flexibility via the side-car savings scheme

The need to tackle the inertia to saving signifies a need to expand auto-enrolment to the self-employed, where some proposals have considered utilising the tax or National Insurance system to do so. At the same time, a flexible saving approach may be needed to enable self-employed workers to respond to income shocks if they need to and to ensure they have emergency savings to fall back on – factors that were clearly raised by self-employed Gen Xers in our qualitative research.

The sidecar savings model, developed by Nest, responds to these challenges. In these schemes, individuals commit to regular automatic payments into an accessible savings account (for emergency savings); any additional savings above an agreed target are rolled over into a pension. These schemes help tackle the inertia to saving, by enabling people to commit to saving in future while having the comfort of a lump sum available for emergencies.

Self-employed Gen Xers were twice as likely to favour a sidecar saving scheme than an automatic enrolment scheme, as currently exists; perhaps indicating that opt-out rates could be lower for such a scheme – although further research is needed. Auto-enrolling people into this scheme, however, is likely to be key, since current NEST trials show voluntary take-up is low. We therefore propose that automatic enrolment is extended to self-employed adults – potentially via the tax system – with an option to save into either a traditional pension or a sidecar savings scheme.

2. Support self-employed workers hit hard by COVID

To support self-employed workers hit hard by COVID to ensure they don’t prematurely leave the labour market, we need to allow self-employed workers to offset all training costs against tax, not just those directly related to current roles, as is currently the case – so they can move into new areas if they need to.

We also need to expand the government’s kick start scheme to all adult workers, which currently has created 120,000 jobs, but is only eligible among 16 to 24 year olds. This could especially support the self-employed who’ve been disproportionately affected by COVID.

3. Support self-employed workers in poor health – by increasing awareness and use of Access to Work support among older workers

The government already supports workers in poor health via the access to work scheme, but use of the scheme is low, and falls after the age of 55. Gen Xers who plan to work for longer will likely need to increasingly use this support beyond this age, especially as the proportion of life spent in poor health is increasing. There is scope to increase the awareness and use among older workers, including the self-employed, where the prevalence of poor health is especially high.

With the oldest Gen Xers retiring in just over 10 years, and the self-employed workforce growing fastest at older age groups, it is paramount that policy makers respond quickly, whilst recognising that most of these challenges have a solution.