Employees making the leap into self-employment could put their retirement at risk, with many unlikely to continue saving into a pension upon leaving auto-enrolment.

Roughly one in five self-employed workers save into a private pension, compared with around four in five employees, leaving those working for themselves at greater risk of having insufficient savings upon retirement, according to findings from the Institute for Fiscal Studies (IFS).

The lack of engagement among self-employed Brits has been deemed urgent by the revitalised Pensions Commission, which has acknowledged warnings from the industry that more needs to be done to boost savings from this cohort.

In particular for those who leave full time employment to be self-employed, with over three-quarters who take the step halting pension allocations, despite having consistently made contributions before.

Average pension contributions also fall off the back of the decline in pension participation.

This has been credited to irregular earnings, the loss of auto-enrolment safety net and many failing to separate business finances from personal.

Young workers and low earners

The drop in participation upon moving into self-employment is largest amongst young people, with only 13 per cent of people under 30 saving into a pension in their first year of working for themself.

While this figure rises year on year, hitting 24 per cent in year five, it remains well below that of older Brits, with roughly 37 per cent aged between 30 and 41 and 38 per cent between 41 and 50 saving into a pension.

But this is consistent with patterns spotted for young workers who have access to auto-enrolment, with many being unlikely to engage with their pension or increase contributions, opting to use capital to deal with more immediate financial problems.

Self-employed Brits who earn less than £36,500 were also found to be contributing less, with participation falling under 20 per cent, compared to higher earners.

Nearly 40 per cent of people earning above £36,500 actively added to their pension.

Average pension contribution rates are also similar for the bottom and middle earnings groups both before and after moving from an employee job to self-employment.

Earning less than £36,500 when an employee, means pension contribution rates fall by around 5 percentage points from around seven per cent before the transition to just 2 per cent of earnings after becoming self-employed.

Need for policy change

The lack of contributions have set off alarm bells both in the industry, as despite the government taking steps to boost pension engagement, many argue not enough is being done to effectively serve this group.

Laurence O’Brien, senior research economist at IFS, said: “Boosting private pension saving among the self-employed is becoming an urgent challenge for policymakers. 

“One moment to target is the point when workers move from an employee job into self-employment, where currently over three-quarters of workers stop saving. Ideally, policies could make it easier for these workers to continue saving in the workplace pension pot they had with their previous employer.

“For example, employers or pension providers could potentially be required to provide more details on how to continue saving in the same pension pot when employees leave their job.”