Is 'autosaving' the new pension solution for the self-employed?

New 'opt out' autosaving apps could get more self-employed people saving for retirement, according to a new finance industry study.

Just 18 per cent of the 4.4million people who work for themselves in this country are actively saving into a pension, it found.

But three quarters would like to do so, and a government-backed project is trying to come up with a new version of pension auto enrolment that would suit them.

'Autosaving' via banking platforms or software used by the self-employed is being floated as a potential solution by Nest Insight, which is trialling options that combine easy access and retirement savings in one place.

The idea is that self-employed people are less likely to opt out of an autosave tool if they retain control over contribution levels, and also the threshold at which their savings start being diverted to a longer-term retirement plan.

This is a version of something previously dubbed 'sidecar' saving. The latest research has involved Lloyds Banking Group creating and testing 'autosave' apps with self-employed volunteers.

People who work for themselves missed out on the successful auto enrolment initiative that opted millions of employees into pensions.

Unless they actively opt out, employees save a minimum of 8 per cent of qualifying earnings - between £6,240 and £50,270 of salary - made up of a combination of personal and employer contributions plus pension tax relief from the Government.

Self-employed people don't get the perk of free contributions from employers into their retirement funds, but do receive tax relief top-ups like everyone else.

The plan involves a self-employed person being automatically signed up to a long-term or retirement savings scheme.

'They can choose whether or not to save,' says Nest Insight. 'If they want to save, they don’t need to do anything.

'They automatically start saving a default amount either into their retirement saving account or, if a liquid buffer is added to the account structure, into an accessible savings account where contributions roll into retirement saving when a set of criteria are reached.'

Someone can opt out, change their savings level, pause or stop saving at any point. If they choose to include a liquid, easy access savings account, they can take out the cash in that at any point without penalty.

Nest Insight adds regarding its research: 'Perceptions of autosave were generally favourable. Over three in four people said they would like to be offered it, or that they didn’t mind.'

Influential think-tank the Institute for Fiscal Studies suggested last year that self-employed people could be persuaded into pension saving when filing annual tax returns.

One of its ideas was forcing them to make an active choice about the size of pension contributions they want to make - with 'zero' being an option - into their own or a default pension plan or Lifetime Isa when they fill in their self-assessment return.

Another was auto enrolling them at a set level of contribution that would ratchet up over time, but which they could opt out of if they wished.

In Nest Insight's new study, it says: 'Self-assessment is relatively universal among self-employed people, and it increasingly offers software interfaces, as HMRC’s platforms become more digital.

'However, self-employed people interact with HMRC on a far less frequent basis than employees do with payroll.

'Also, in these cases, a self-employed individual is generally paying taxes to HMRC, rather than receiving a stream of income from which a retirement contribution could be deducted.'

Read More

It adds there are structural challenges that currently make it difficult to manage enrolment and contributions into private savings vehicles through self-assessment, though there might be opportunities as Making Tax Digital evolves, but it is not carrying out tests in this area.

Nest Insight, which is a research unit set up by Government-backed pension provider Nest, says its next steps will be trialling and fine-tuning autosaving on a larger scale, and exploring how it would work in real world settings

The Department for Work and Pensions is supporting the project, and Pensions Minister Torsten Bell says: 'Initial responses of the participants to the idea were positive and suggest it is worth further exploration of an autosave feature embedded within banking platforms and self-employment software platforms.'

He says this is provided the feature offers transparency and control over contributions, the threshold at which savings would roll into a pension, and the option to pause or cancel at any time.

'The online lab-based study also explored a sidecar-like, or hybrid approach, which may be particularly beneficial for those with irregular incomes,' says Bell.

'It found that retirement saving accounts which include an element of accessible savings may encourage higher participation rates. The presence of a liquid savings buffer appears to provide a sense of control and reassurance to self-employed people.'

Graeme Bold, managing director of pensions and retirement at Scottish Widows, part of Lloyds, says: 'The self-employed pensions gap is critical – more than half of self-employed individuals are on track for poverty in retirement, compared to just 25 per cent of full-time workers.

'Self-employed workers need flexibility, and our study allowed us to test hybrid, flexible savings models tailored to their unique needs. The results are a significant leap forward.'