There's no doubt about it, auto enrolment, once fully rolled out will go a long way in helping to solve the pensions crisis. With millions not saving towards retirement, a huge financial crisis was looming, with the state being unable to fund a comfortable retirement for thselfee millions of people who had never saved towards their own retirement.
The advent of auto enrolment
For years, governments had tried to incentivise people into saving towards their later years. Various schemes have tried and failed to entice people to start saving but all have ultimately failed. Unless people are forced to save for their retirement, many simply will not. That's what is brilliant about auto enrolment. It doesn't force people to save towards their retirement, but simply places the onus on people to opt out of saving for their retirement, and it is expected the majority of people will simply go along with auto enrolment and will build up a reasonably sized pension pot by retirement.
Self employed not affected by auto enrolment
However, there are a significant amount of working people that are not affected by auto enrolment, the self employed. Statistics from the ONS (Office for National Statistics) indicate that 15% of the population are self employed, totalling 4.6 million people. The numbers look set to rise even further, as the number of self employed people has risen steadily since 1975, where just 8.7% of the population were self employed. It's estimated that nearly 50% of these (approximately 2.3 million) do not have any pension provision. About 15% of these people intend to use the funds from the eventual sale of their business to fund their retirement, whilst just under 30% will be solely reliant on their state pension.
The importance of saving for retirement
This is obviously something that needs addressing. It can often be difficult for the self employed to distinguish their personal finances from their business'. In a tough economic climate, investing for retirement often gets put on the back burner in favour of investing in the business.
However, it's crucial that the self employed start taking action about saving for retirement. It's understandable that many see investment in their business as a priority but ultimately if this is done at the sake of a personal retirement provision, it can be a very risky strategy. Should the business be successful, it may provide an alternative retirement provision. If it fails though, what then? The state pension should not be seen as a safety net, and the self employed should plan for the future without a state pension as there is no guarantee that there will always be one.
It's important that the self employed understand that pensions offer fantastic tax advantages and they should take action as soon as possible by talking to a financial advisor. Doing so could be one of the most important decisions they will ever make.