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Gig workers miss out on £75,000 in pensions

Gig workers miss out on £75,000 in pensions

Category: Pensions
08/11/2017

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The gig economy is a growing part of the workforce, with some 5 million people (roughly one in six workers) thought to fit into this category, ranging from the self-employed to those on zero hour contracts. Yet while they can benefit from flexibility, they miss out on the benefits of being in traditional employment, and for many, that means they're losing out on serious amounts of pension cash – putting their retirement income in jeopardy as a result.

Workers missing out

Research from the Pensions Policy Institute for Zurich has found that gig workers are missing out on up to £75,000 in pension savings as auto-enrolment doesn't extend to this sector of the workforce. These workers have little or restricted access to workplace benefits such as pensions, which could significantly impact their retirement outcomes, as not only are they failing to contribute to a workplace pension, but they're missing out on employer contributions and tax relief in the process.

However, this could all change if they start paying into a pension. Calculations show that, if a typical gig worker who's now aged 25 and earning £25,000 put aside 4% of their annual income when completing their tax returns into a pension – as recommended by the Taylor review – they could end up with a £75,000 lump sum at retirement. When combined with the state pension, this could equate to an annual retirement income of £13,500.

Furthermore, if the current auto-enrolment system was applied, they could end up with a pot of £101,500 and an annual income of almost £15,000 per year (when including the state pension), which could go a long way to ensuring that these workers have a comfortable retirement.

Pensions blind spot

Action clearly needs to be taken to ensure that gig workers are properly catered for in later life, with Chris Atkinson at Zurich UK saying there's "a blind spot in the current pension system" that's resulting in millions of gig workers failing to save enough for retirement as they don't have access to a workplace pension.

"The gig economy has rapidly brought about a redefinition of the contracts between employers and employees," he said, "[and] it's time our nineteenth century welfare system was overhauled for the 21st century world of work. Using tax returns to extend auto-enrolment to the gig economy would be a step in the right direction."

However, Chris accepts that this still may not be enough to ensure that individuals have a big enough pot in retirement, as "the reality is that many gig workers may have to work far longer than even traditional employees before they can retire.

"This will be at a time when they are more vulnerable to financial shocks from ill health – or may find it harder to get a job in the first place. As well as saving more of their income earlier in life, it's vital gig workers ensure they have a financial cushion in place should the unexpected happen."

It's therefore particularly worrying to find that, not only are gig workers failing to save adequately for retirement, they're also failing to protect their current income.

Growing protection gap

The report identified a widespread protection gap among gig workers, with 53% not receiving any benefits at all from the gig company they work for, and just 2% having access to life insurance, income protection and critical illness through their employer, highlighting a clear lack of financial recourse should they become unable to work.

As a result, almost a third (29%) said they would rely on state benefits should they lose their income, while 16% would be forced to sell personal possessions, neither of which will result in a comfortable or long-term standard of living.

"While the gig economy offers freedom for some it comes at the expense of financial security," said Chris. "This is storing up a potential welfare crisis for the State. Income protection needs to be at the heart of any UK welfare solution, [but] it is incredibly important gig workers are aware of the benefits of protection in the first place. This is where information, guidance and advice all play a key role."

Zurich is therefore recommending, among other things, that auto-enrolment be expanded to the self-employed via the tax return system, that gig employers are incentivised to offer income protection and that they provide greater financial education to their workers, which would hopefully ensure this sector of the workforce is more financially resilient. In the meantime, don't wait for your employers or legislation to step in – start building a pension pot and financial buffer, and hopefully you won't lose out in the long term.

What next?

Find out more about the kinds of pensions available, as well as life insurance and income protection.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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