A new report from the Institute of Fiscal Studies (IFS) has raised alarms over the financial future of nearly two million self-employed individuals in the UK who are not saving into a private pension.

The report highlights a concerning gap in pension participation among the self-employed, potentially leaving many facing financial difficulties in retirement.

The IFS found that only 500,000 of the 2.3 million self-employed individuals earning over £10,000 have a private pension, in stark contrast to the 80% of employees who are saving for retirement.

This marks a significant decline in pension savings among the self-employed since 1998, when 60% of them were contributing to a pension.

The report warns that this decline means three-quarters of self-employed workers are on track to have a retirement income below £15,000 per year, compared to just one-third of employees. The current pension policy for the self-employed, the IFS argued, is “not fit for purpose” and fails to make it easy for them to make sound saving choices.

To address the issue, the IFS called for several reforms. These include requiring self-employed individuals who file a Self Assessment tax return to actively choose the level of pension contributions they wish to make and introducing an automatic enrolment system similar to the one already in place for employees.

The report also suggested automatically increasing pension contributions via direct debit in line with inflation to ensure that self-employed individuals contribute more appropriately over time.

Laurence O'Brien, research economist at the IFS, pointed out the stark difference in how governments have supported employees versus the self-employed when it comes to retirement savings.

“Successive governments have put great effort into establishing automatic enrolment for employees to make it easier for them to save for retirement and have done so with much success,” O'Brien said. “In contrast, the self-employed are left to their own devices.”

Mubin Haq, Chief Executive of the abrdn Financial Fairness Trust, which partnered with the IFS for the report, echoed these concerns. “The self-employed make up an increasing share of the UK's workforce but far too many are on track to have a poor retirement,” Haq said.

“More than half have no private pension savings. Auto-enrolment was a sea-change for employees, rapidly increasing the numbers saving into a pension. We now need to use similar methods for the self-employed to actively nudge them into thinking about their financial futures.”

With the self-employed becoming an ever-larger part of the workforce, the report underscores the urgency for action to address the pension savings shortfall and ensure that millions of workers are not left relying solely on the state pension and modest savings in their later years.