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| Self-employed? Don’t wait to start saving for retirement | Self-employed? Don’t wait to start saving for retirement |
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| Around 4.5 million people now work for themselves, equivalent to one in seven of the UK workforce, official figures revealed last week. Yet few are able or willing to think about their financial futures, experts believe, with just 18% contributing to a pension, compared with 48% of employees. | Around 4.5 million people now work for themselves, equivalent to one in seven of the UK workforce, official figures revealed last week. Yet few are able or willing to think about their financial futures, experts believe, with just 18% contributing to a pension, compared with 48% of employees. |
| This swollen self-employed army is “lagging badly” with far too few saving adequately for old age, says Scottish Widows. State pension reforms mean that with a complete national insurance record you can expect to receive close to £8,000 a year when you retire, but you are likely to need far more for a comfortable old age. | This swollen self-employed army is “lagging badly” with far too few saving adequately for old age, says Scottish Widows. State pension reforms mean that with a complete national insurance record you can expect to receive close to £8,000 a year when you retire, but you are likely to need far more for a comfortable old age. |
| Related: £1bn taken out of pension pots is a sign of new policy's success, says Osborne | Related: £1bn taken out of pension pots is a sign of new policy's success, says Osborne |
| “Self employed people generally need to keep their finances more flexible to cater for any downturns in their earnings,” says Patrick Connolly from independent financial adviser Chase de Vere. “But pensions shouldn’t be ignored. They benefit from initial tax relief, and contributions can also bring people below certain tax thresholds or retain eligibility for child benefit.” | “Self employed people generally need to keep their finances more flexible to cater for any downturns in their earnings,” says Patrick Connolly from independent financial adviser Chase de Vere. “But pensions shouldn’t be ignored. They benefit from initial tax relief, and contributions can also bring people below certain tax thresholds or retain eligibility for child benefit.” |
| What’s more, the pension rules introduced in April mean those aged 55 or over can access their pension whenever and however they want. | What’s more, the pension rules introduced in April mean those aged 55 or over can access their pension whenever and however they want. |
| Why save into a pension?For most self-employed people, the best approach to long-term savings is a mixture of Isas and pensions. Many Isas are instant access, ideal if your earnings are unpredictable. | |
| With a pension, the government offers relief on your contributions equal to the amount of income tax you pay. So if you are a basic rate taxpayer, a £100 contribution costs you just £80 of net pay. That goes down to £60 if you are a higher rate taxpayer, and £55 if you are an additional rate taxpayer. Growth is free of income tax and capital gains, and the first 25% you release at age 55 is tax free too. Pensions are also tax free for your beneficiaries if you die before retirement. | With a pension, the government offers relief on your contributions equal to the amount of income tax you pay. So if you are a basic rate taxpayer, a £100 contribution costs you just £80 of net pay. That goes down to £60 if you are a higher rate taxpayer, and £55 if you are an additional rate taxpayer. Growth is free of income tax and capital gains, and the first 25% you release at age 55 is tax free too. Pensions are also tax free for your beneficiaries if you die before retirement. |
| How much should you be saving?Typically, advisers say a half to two-thirds of your current income will be enough to meet your needs when you retire on. The earlier you start putting money aside, the better. | |
| “Someone saving £100 a month for 40 years would put the same amount into their pension fund as someone starting 20 years later and putting £200 a month in,” says David Smith, director of financial planning for Bestinvest. “Assuming 6% investment growth throughout, the person starting at age 25 would build a fund of around £190,000, while the 45-year-old’s fund would grow to around only £90,000.” | |
| When Rawaa Abdalla-Lindqvist, 33 and who lives in London, started freelancing in healthcare communications, a pension wasn’t a priority. “First I had to save for the exotic, extended holiday. Then I got married and bought a flat, and every penny went towards that,” she says. “ My accountant has been telling me for years I should start paying into a pension, and now my husband has joined in on the act.” | When Rawaa Abdalla-Lindqvist, 33 and who lives in London, started freelancing in healthcare communications, a pension wasn’t a priority. “First I had to save for the exotic, extended holiday. Then I got married and bought a flat, and every penny went towards that,” she says. “ My accountant has been telling me for years I should start paying into a pension, and now my husband has joined in on the act.” |
| Abdalla-Lindqvist chose to top up the same pension she had when she was employed, an Aviva stakeholder with moderate risk. “It was easy to start saving again. I gave them a call to update my details, set up a new direct debit and I was done,” she says. | Abdalla-Lindqvist chose to top up the same pension she had when she was employed, an Aviva stakeholder with moderate risk. “It was easy to start saving again. I gave them a call to update my details, set up a new direct debit and I was done,” she says. |
| She puts aside whatever she can afford each month. If it turns out to be a good year, there’s scope for her to save extra aside in an Isa. “You have to be the one to put money aside. The state pension isn’t going to cut it.” | She puts aside whatever she can afford each month. If it turns out to be a good year, there’s scope for her to save extra aside in an Isa. “You have to be the one to put money aside. The state pension isn’t going to cut it.” |
| Where to start?You can choose between a personal pension, a stakeholder pension or a self-invested personal pension (Sipp). The differences are the level of charges you have to pay, the flexibility about when and how much you can save, and the investment choices available to help grow your pot. | |
| “If you are starting from scratch paying in small amounts a month, a stakeholder pension with flat rate charges of, say, 1% is a good option,” says Jason Witcombe of Evolve Financial Planning. He suggest a long-term, diversified, low-cost tracker as a sensible investment option. | “If you are starting from scratch paying in small amounts a month, a stakeholder pension with flat rate charges of, say, 1% is a good option,” says Jason Witcombe of Evolve Financial Planning. He suggest a long-term, diversified, low-cost tracker as a sensible investment option. |
| Scott Gallagher of Rowley Turton says if people don’t want to pay for tailored advice they can’t go too far wrong with the Nest scheme. This was set up for the government’s auto-enrolment programme, but it also accepts self-employed people, too. | Scott Gallagher of Rowley Turton says if people don’t want to pay for tailored advice they can’t go too far wrong with the Nest scheme. This was set up for the government’s auto-enrolment programme, but it also accepts self-employed people, too. |
| Nest charges work out at about 0.5% for most savers, significantly lower than many stakeholder options. You can view and make changes to your account online, stop and start contributions, and pay in by direct debit or with your debit card. Nest has five funds to choose from, designed to match your appetite to risk, as well as ethical or religious beliefs. | Nest charges work out at about 0.5% for most savers, significantly lower than many stakeholder options. You can view and make changes to your account online, stop and start contributions, and pay in by direct debit or with your debit card. Nest has five funds to choose from, designed to match your appetite to risk, as well as ethical or religious beliefs. |
| Connolly, meanwhile, favours a personal pension which enables you to access between 100 and 300 external funds. Examples include Scottish Life Pension Portfolio, Standard Life Active Money Personal Pension,and Legal & General Portfolio Plus Pension | Connolly, meanwhile, favours a personal pension which enables you to access between 100 and 300 external funds. Examples include Scottish Life Pension Portfolio, Standard Life Active Money Personal Pension,and Legal & General Portfolio Plus Pension |
| Usually an employer will have negotiated good terms, so you may find carrying on with a group scheme is better value | Usually an employer will have negotiated good terms, so you may find carrying on with a group scheme is better value |
| What should I do with old pensions?If you are recently self-employed and have an employers’ pension, it may pay to leave it. Many insurers let you carry on contributing and, says Witcombe, “usually an employer will have negotiated good terms for staff, so you may find carrying on with a group scheme is better value.” Beware that some plans are subject to high transfer penalties of 10%- 50% of a fund’s value. | |
| TAKING A SIPP | TAKING A SIPP |
| Self-invested personal pensions are considered the default pension choice for many self-employed people. | Self-invested personal pensions are considered the default pension choice for many self-employed people. |
| “Many Sipps offer access to a full range of personal pension funds,” says Robert Cochran of Scottish Widows. “These usually include the same lifestyle funds that are accessed via employer auto-enrolment schemes as well as a much wider range of investment choices – right up to direct commercial property purchase which is often favoured by business owners.” | “Many Sipps offer access to a full range of personal pension funds,” says Robert Cochran of Scottish Widows. “These usually include the same lifestyle funds that are accessed via employer auto-enrolment schemes as well as a much wider range of investment choices – right up to direct commercial property purchase which is often favoured by business owners.” |
| However, a Sipp is the most appropriate pension wrapper only for those who want the additional flexibility or investment choices. They come with heftier charges, which many advisers say there is little point in paying if you don’t utilise the extra functionality. | However, a Sipp is the most appropriate pension wrapper only for those who want the additional flexibility or investment choices. They come with heftier charges, which many advisers say there is little point in paying if you don’t utilise the extra functionality. |
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