The number of people saving into workplace pensions has increased by more than five million in the past four years – but there’s one group of workers who are bucking the trend.

The automatic enrolment of employees into workplace pensions doesn’t extend to the UK’s 4.4m self-employed people.

And pension coverage among the self-employed isn’t just low – it’s falling and has reached what experts are calling “crisis levels”.

The Department for Work and Pensions estimates that in the mid 1990s, 62% of self-employed men were saving into a pension. By 2012 that number had fallen to just 22%.

Whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels

Steve Webb, director of policy, Royal London
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Pensions provider Royal London, in its latest report, said millions of self-employed people are heading for poverty in retirement unless action is taken.

The report – ‘Britain’s Forgotten Army’ (pdf)– says there is a way of getting self-employed people saving into pensions that mirrors the approach used for employees.

It suggests increasing the National Insurance contributions paid by self-employed people on their profits.

The extra contributions would then be diverted to a pension or Lifetime ISA – as long as people made their own direct contribution.

Royal London reckons around three million self-employed people would be covered by the proposed scheme.

National Insurance contributions for self-employed people are linked to profits. Image by XiXinXing/

Steve Webb, director of policy at Royal London, said: “Self-employed people are missing out on the surge in pension scheme coverage among employed earners.

“Indeed, whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels.

“It is time for action. Using the existing National Insurance system to mirror the process of automatic enrolment is the best way of giving self-employed people a ‘nudge’ to start saving for a pension.”

Mr Webb said that as National Insurance contributions are linked to profits, they would automatically go up in good years and down in bad years under Royal London’s proposed system.

“Without action, millions of self-employed people could face poverty in old age,” he added.

Mike Cherry, national chairman of the Federation of Small Businesses, said: “With the number of people choosing to be self-employed at a record high, this is a subject which needs much greater thought and attention.

“FSB will shortly be publishing our own research which will shed further light on the challenges raised in this timely Royal London report.”

Huw Evans, director of the Association of British Insurers, added: “I hope Royal London’s proposals kickstart the debate that is needed so the decline in retirement saving from the self-employed can be tackled effectively.”