TPR chief backs using tax returns to bring self-employed into pensions

Giving evidence on June 8 to the Work and Pensions Committee under the third stage of its inquiry into pension freedoms, looking into savings for later life, Counsell argued that in his opinion the tax system is the “most likely way to be able to get more self-employed people saving for pensions — something like through the annual tax return”.

This would involve using tax returns to default the self-employed into a pension with the ability to opt out, in a similar way to how auto-enrolment works.

Back to basics

The tax system is the most likely way to be able to get more self-employed people saving for pensions – something like through the annual tax return

Charles Counsell, TPR

Counsell said it was important to get back to the basic principles and find the right nudge to get the self-employed saving, after the long-term decline in these individuals investing in a pension in recent years.

He pointed to the success of auto-enrolment in improving previously low levels of pension saving: “Before automatic enrolment, individuals didn’t access pension savings apart from those who tended to be wealthy. We saw a decline in the number of people saving into pensions, and enrolling them into AE of course absolutely reversed that.”

According to the Department for Work and Pensions, the proportion of these individuals participating in private sector pensions has dropped to 16 per cent in 2019-20 from 21 per cent in 2009-10.

Pressures on self-employed workers have further increased due to the coronavirus pandemic and the cost of living crisis. This is mainly due to most self-employed people not being included in the auto-enrolment regime.

As of March 2022, there were around 4.23mn self-employed workers in the UK, a gradual rise since December 2000 when the number was only 3mn.

In the 2017 auto-enrolment review, the DWP discussed running various trials for the self-employed, which resulted in a decision to use the existing online income tax return system to signpost those who declare they are not paying into a pension to MoneyHelper guidance to sources of information about pensions. Around 2mn self-employed people fill in a tax return every year.

Also giving evidence to the committee, Sir Steve Webb, former pensions minister and partner at LCP, called for the tax return process to be used to default the self-employed into a pension with the ability to opt out, warning that saving among the self-employed has fallen from what were already “pathetically low levels”.

He said one of the lessons from auto-enrolment is that TV advertising campaigns and pension statements might give savers a little bit of a push into pensions, but it is “mass action through defaults that actually works”.

Baroness Jeannie Drake, former member of the Turner Pension Commission, also told the parliamentary committee that she supports using the tax system to get as near to auto-enrolment as possible, pointing out that actively engaging with the self-employed is not enough to mass coverage or substantial reaction.

“You could do it via frequent tax returns and set the tax rate based on assuming you’re making a pension contribution unless you opt out, and then it’s handed over together with the relief and source relief either to Nest or another chosen pension scheme,” she said.

However, Drake pointed out that this system might not work for all self-employed people, given that the characteristics of this group have changed over the past 10 years.

“You’ve got many more low-paid and women [among the self-employed], so you need to be sure you understand the full implications. And it may be for a lot of self-employed that the answer lies in the contract of employment like the Uber workers,” she added.

A landmark Supreme Court case in March 2021 ruled that Uber must classify its drivers as ‘workers’, which entitles them to be auto-enrolled into a pension scheme. The ride-hailing app is auto-enrolling employees into master trust Now Pensions and has invited its competitors to create a cross-industry scheme.

High opt-out rates warning

There is some concern that if the tax return regime were used to default the self-employed into pensions, opt-out rates would be higher for the self-employed than for the employed and have stayed broadly around 9-10 per cent since the introduction of auto-enrolment.

Explaining why, Counsell said: “[This is] mostly because in the end, if you’re self-employed, just as if you are an employer, you are the sole directors and you don’t have employees, you make your own decisions, and everything you do about your business is your decision. So, I suspect that there will be a higher rate of opt-outs even if we nudge people into it.”

However, he added that if we “nudge people into it and we get a decent proportion of people saving, that is a big success”.

In its feedback to the call of input on the pensions consumer journey, published on June 7, TPR stated that lowering the auto-enrolment wage threshold could lead to many more people in the gig economy being brought into pension saving.

But the statement added that many gig workers will already be eligible for auto-enrolment, including those on fixed-term contracts, agency workers and those on zero-hours contracts, subject to meeting criteria.

“To that end, TPR expects employers in the gig economy to comply with their responsibilities promptly,” the statement said.

Trials are under way supported by the DWP with the involvement of Nest to test the role of tech-based nudges and the value of flexible saving mechanisms to help self-employed people save for retirement. Analysis and evaluation of these trials are expected this summer.