Robert Reid: Self-employed pension solution is sensible but promotion would be fraught with danger


Last weekend saw the launch of a proposal that addressed the significant decline in pension provision by the self-employed. Given the author is former pensions minister – now Royal London director of policy – Steve Webb, it is bound to attract significant attention.

The statistics are dramatic. In 1996/1997, 60 per cent of self-employed people were making pension provisions. In 2012/2013 the number had dropped to 20 per cent.

Since 2000, the self-employed population has grown significantly, with one million more individuals. It could be argued this has skewed the figures but irrespective of that it is a significant shift that should not be ignored.

So, what is actually being proposed? The idea is to increase the level of National Insurance contributions paid by the self-employed but to give them the option of moving that increase into their own plan.

It is an interesting concept but the price of putting the additional NICs into your plan is a further  5 per cent contribution.

If this is aimed at all self-employed people, then those making significant profits are getting off lightly.

To address that issue the current ceiling for the higher level of National Insurance should probably get removed or, at the least, this 3 per cent “levy” should add to that figure too. So instead of 2 per cent in excess of £43,000 it would actually be 5 per cent, with the facility for that 3 per cent to be redirected.

What is not clear in these proposals is the detail on how it will work in practice. If someone is already making significant provisions, would it be necessary for them to stop, then restart and pick it up as bonus, or can they just pick it up anyway? My hope would be the Government would make it as simple as possible but, as we know, that is unlikely.

The promotion of this particular idea, if it ever was to come into legislation, would be absolutely fraught with danger, given the track record of the Department for Work and Pensions in promoting any kind of incentives to pension saving.

It is highly likely the self-employed public would simply see this as an increase in taxation.

While on the subject of pensions, I cannot remain silent on another proposal, suggesting we should allow employees to use their personal plans when being auto-enrolled. There are two fundamental flaws with this idea: the 75 basis points charge cap does not apply to individual plans and it takes no account of the absence of a pension contributions clearing house.

This means an employer could be faced with 10 or 12 different direct debits coming out of their account at different times in the month, depending on who sets them up, not forgetting these employer contributions have to be paid no later than the 19th of the month following deduction from the wages.

Just who would be content to co-ordinate all this, be that the payroll company or employer, I simply cannot imagine. It is a crazy suggestion that comes from people with absolutely no experience in the administration (or, more correctly, the maladministration) of pensions in this country.

Robert Reid is director of The Ideas Lab