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The rise of self-employment in the UK has been remarkable. Since 2001, self-employed people have gone from accounting for 12% of the labour force to over 15% today, with 1.5 million more self-employed workers. When it comes to saving, however, this trend has brought with it a number of challenges. 

The most obvious issue is that self-employed workers are very much disengaged with traditional pensions; just 31% of the self-employed are paying into a pension, compared to 78% of employees. Strikingly, the median amount of pensions wealth held by the self-employed aged 65 and over is only £36,500, compared to £108,000 for employees. A large proportion of the self-employed do not engage with savings at all. Indeed, roughly a quarter of self-employed people under 35 hold no savings products whatsoever. 

This is not to say that self-employed people are not interested in saving. Two-thirds are concerned about their financial wellbeing in later life. What stops them saving is often the nature of self-employment itself. The top three reasons cited by self-employed people for not saving into a pension are: being unable to afford it; having a low income; and, having too many expenses, bills or debts. Erratic income is another issue: in one survey by the Federation of Small Business, 60% of self-employed reported extended periods of two weeks or more when they were not earning. 

Clearly, part of the problem is practical in nature – self-employed people want to save more, but are prevented from doing so by the challenges of their financial situation. But there is also reason to think that, at a more fundamental level, self-employed people have different attitudes to saving compared to their employed counterparts. 

Self-employed people rely relatively more on property as a source of wealth to build up their savings, and have an altogether more optimistic view of property than employees. Whereas only 40% of employees agree that property makes the most of your money, over half (53%) of self-employed agree. Even more striking is self-employed people’s perception of the safest way to save for retirement: less than 30% of self-employed think that a pension scheme is the safest way to save for retirement, but 43% say property is safest. The picture is starkly reversed for employees: just a quarter deem property the safest way to save, while over half opt for pension schemes. Perhaps unsurprisingly, 65% of self-employed workers hold more in property wealth than in pension wealth, compared to just under half of employees.

But property looks ever less viable as a strategy for retirement as the affordability of housing declines. Since 1997, the ratio of median house prices to median earnings has increased from 3.89 to 7.83. This has been accompanied by a collapse in homeownership: at age 27, those born in the late 1980s had a homeownership rate of 25%, compared with 33% for those born in the early 1980s and 43% for those born in the late 1970s. 

As young people struggle to get onto the housing ladder, property wealth can no longer be relied upon as the source of a good retirement. In fact, on current trends, 52% of pensioners will be paying more than 40% of their income on rent by 2038. As a consequence, over 600,000 of today’s millennials (those born between 1981 and 1996) will be unable to afford their rent in retirement. This is a ticking time-bomb that presents huge challenges for both self-employed individuals and for the state.

Property is not only more difficult to acquire than in the past, but may not be a suitable source of income in retirement. Property wealth can of course be released in a lump-sum if the owner sells it. The first problem with this is that it does not provide a sustained income in retirement. Another problem is that, although many people express a desire to downsize and release equity, in practice a lack of suitable properties and the costs of moving mean that this often doesn’t happen. 

Equity-release products that enable property wealth to be converted into a steady income exist, but such products can be expensive and come with high interest rates. Equity release products are also complex; one survey found that only 11% of over-55s claim to fully understand them. In sum, a key factor in the self-employed’s aversion to pensions is their lack of flexibility, however inflexibility is a charge that can also be laid against property wealth. 

To resolve the savings crisis, part of the solution will be increasing the appeal of pension schemes for cash-strapped self-employed with sporadic income. But it will also involve engaging with fundamental beliefs the self-employed have about saving vehicles, and challenging the widespread notion that property is a safer bet than pensions.

Sam Robinson is a Researcher at Bright Blue.