Increased NICs could solve self-employed pension 'crisis'

A report, published this weekend, suggests National Insurance contributions (NICs) should be increased in order to solve the self-employed pensions crisis.

Royal London believes Class 4 NICs paid by self-employed professionals should rise from nine per cent to 12 per cent.

The mutual suggests that the extra funds could be put into a pension of Lifetime ISA, providing savers make their own five per cent contribution – matching the minimum eight per cent contribution under auto-enrolment.

However, if the personal five per cent contribution isn’t made, the Government would cease its contribution too. Royal London says the NICs reforms would buoy the level of self-employed saving, which has plummeted over the last couple of decades.

The Department for Work and Pensions estimated that almost two-thirds (62 per cent) of self-employed males saved into a pension in the mid-1990s, but by 2012, this figure had fallen dramatically to less than a quarter (22 per cent).

Nevertheless, amid the pension decline, the self-employed population has grown exponentially.

Steve Webb, director of policy, Royal London, said: “Self-employed people are missing out on the surge in pension scheme coverage among employed earners.

“Indeed, whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels.

“It is time for action. Using the existing National Insurance system to mirror the process of automatic enrolment is the best way of giving self-employed people a ‘nudge’ to start saving for a pension.

“In addition, because self-employed NICs are linked to profits, contributions would automatically go up in good years and down in poor years. Without action, millions of self-employed people could face poverty in old age.”

Mike Cherry, national chairman, the Federation of Small Businesses (FSB), believes the sheer numbers of self-employed professionals today make this a highly pertinent issue.

“This report makes an interesting and valuable contribution to the debate surrounding how to best support the self-employed to save for their retirement,” said Cherry.

“With the number of people choosing to be self-employed at a record high, this is a subject which needs much greater thought and attention.

“FSB will shortly be publishing our own research which will shed further light on the challenges raised in this timely Royal London report.”

Date published 25 Apr 2016 | Last updated 25 Apr 2016