The Financial Wellbeing Of The Self-Employed

Posted by John Adam on November 26


A new report released on October 10th 2019 by Nest Insight details the first stage of a research project designed to shape government policy supporting the retirement savings of the UK’s 5 million self-employed professionals. Nest Insight, who produced the report, are the research unit of the Nest auto-enrolment pensions provider set up by the UK government. With Office for National Statistics data clearly showing rising numbers of self-employed individuals in the UK (there were around 3.1 million, circa. 2 million less, in 2001), there is a growing awareness that more needs to be done to support the current and future financial wellbeing of what is a quickly growing demographic.

The auto-enrolment scheme is ensuring that a large majority (73% and 87% eligible for auto-enrolment) of UK workers who are traditionally employed now save towards a workplace private pension fund. But only 15% of the 5 million (from a total working population of around 32 million) workers registered as self-employed actively contribute regular payments into an occupational or private pension product. And with almost a quarter (24%) of the self-employed individuals questioned by researchers holding absolutely no savings or investment products, there is an obvious need for steps to be taken to improve the government support offered to this demographic in their efforts to achieve financial security.

Other key findings around the financial wellbeing of the self-employed highlighted by the report include:

  • 39% find it hard to keep up with the cost of living
  • 31% are unsure of when they will have money
  • 27% rarely save or don’t at all
  • 51% save for something every or most months

When it comes to long term financial planning the key statistics were:

  • 74% think it’s important to save towards retirement
  • 50% are not confident about how they will fund their retirement
  • 35% are put off thinking about pensions because it makes them nervous
  • 24% currently contribute towards a pension

While many self-employed professionals do have their shorter and longer term finances under control, there is also a significant number who show signs of stressed ‘financial wellbeing’. When it comes to long term planning towards financial security in retirement, the situation appears to be particularly pressing. 24% of a 5 million-strong section of a 32 million workforce making no contributions towards a pension at all, and 35% burying their heads in the sand over pension provisions to avoid worry, is a situation that needs to be tackled.

The short term financial situation of the self-employed does not seem to differ hugely from that of the traditionally employed. Another recent study on financial wellbeing conducted early this year by Salary Finance showed that 34% of working people regularly run out of money before their next pay packet and that nearly a third of UK households have no cash savings at all. And 70% of those surveyed said they saved less than £100 a month, which would take a long time to build up to a solid rainy day cash buffer - recommended at between 3 and 6 months of basic expenses.

A lack of savings representing a cash buffer, said the same study, contributes to 4 in 10 people having financial worries. It can be inferred that, given the relatively comparable statistics around short term financial security of the traditionally and self-employed, the percentage of the latter exhibiting symptoms of poor financial wellbeing is similar. And the Nest Insights report confirms that – though the number of those polled actually shows slightly less suffering from short-term cash flow difficulties compared to those employed by companies.

However, when it comes to retirement provisions, the self-employed appear to be significantly worse off. That can be, in large part, connected to the fact the self-employed are not automatically part of the auto-enrolment scheme and have to make pension arrangements on their own initiative. And to do so without the security of knowing exactly how much will drop into their bank account reliably each month.

The consequence of that is, concluded the Nest Insights report, a need for the UK government to offer greater financial wellbeing support to the self-employed – particularly around retirement savings. The report also looked at the ways that might most effectively be achieved. Finding effective ways to communicate the need to save towards retirement, and provide effective triggers to actually doing so, is, the report recognises, more complicated for the self-employed demographic compared to auto-enrolment contributions that employees have to actively opt out of.

The report found that one key to effectively communicating with the self-employed around long term savings and retirement provisions is to recognise the diversity of the demographic. And that there will be no effective ‘one size fits all’ approach to communication. However, 55% would welcome increased guidance and intervention as a help to them saving more towards retirement.

Three kinds of communication that look most promising in reaching as many of the diverse demographic of the self-employed as possible were highlighted as:

Focusing on the here and now: people are keen to know what they can do now, not what they should have done in the past or what might happen in the future.

Emphasising control: people are highly sensitive to anything that feels like selling and want to make up their own minds.

Giving the facts: simply providing clear information and addressing common myths with facts can be effective.

And when it comes to finding effective triggers to improve long term savings patterns among the self-employed, tests showed the following three as most consistently effective:

Palatable contributions: describing contributions as a daily rather than a monthly amount can make saving for later life feel more manageable and in reach.

Pension flexibility: people assume that pensions will be rigid and rule bound – emphasising that you can pay ‘what you can when you can’ reassures people.

Tax benefits: tax relief was highly motivating. Although self-employed people don’t get an employer contribution, the ‘free money’ message is still powerful for pension saving.

With the support of the government Department for Work and Pensions, Nest Insight is carrying out further research around how to better support the long term financial wellbeing of the UK’s self-employed. Preliminary findings are due to be reported by the end of 2020 and will hopefully contribute towards an effective government policy that will help improve financial wellbeing across what is a major UK workforce demographic. We’ll be waiting with interest to see what conclusions and actionable roadmap the deeper research now ongoing will result in.

Written by John Adam

John has almost 10 years of experience as a writer and editor on consumer finance and investment topics. An entrepreneur, he has one successful exit behind him and currently writes and consults freelance while enthusiastically pursuing hobbies he's not very good at such as football, squash and raising a small child.

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