Retirement 101 for the self-employed
Recent data from the Office of National Statistics showed that self-employment made up the bulk of jobs in the first three months of the year. Of the 283,000 people that found work between January and March 2014, nearly 65% were self-employed. While many people enjoy the freedom of working for themselves, one of the key problems facing them is planning for retirement - irregular incomes can be challenging, and saving can be difficult because of the need to put earnings back into the business to help it grow. The basic state pension covers the self-employed if they have paid National Insurance for 30 years, but there is little else for those who are their own boss. To help with this, here are our top tips on saving for retirement if you're self-employed.
Seek financial advice
This applies to everyone, but it's particularly important for the self-employed because the auto-enrolment scheme is limited to those in regular employment - meaning people that work for themselves are unaffected. Thus, a retirement that doesn't depend on the basic state pension requires forward planning, and an impartial financial adviser can explain all the available options, how they work, what fees may be involved, as well as any risks.
There's little sense in hoping to retire at 65 but waiting until 62 to start retirement savings, and putting money away as a teenager would result in a good sized pension pot thanks to decades of compound interest working its magic. This may not always be feasible, but the point is the earlier you start saving, the bigger your pot will be. Money Advice Service gives the following example, assuming a 6% investment growth:
- Saving £100 a month for 40 years, from 25 to 65, would yield £190,000
- Saving £200 a month for 20 years, from 45 to 65, would yield just £90,000
It goes without saying that the more money you can squirrel away the better, but even the smallest amounts add up. It's also worth remembering that pension contributions receive tax relief, so for every contribution the individual makes, HMRC will add extra depending on their marginal tax rate.
Pay National Insurance
There can be a temptation to prefer cash in hand, or have an accountant try to reduce the amount of tax to be paid at the end of the financial year, but these can have troublesome consequences at retirement time. Because the state pension is based on National Insurance contributions, and the full amount is currently only paid if 30 years of contributions have been made, retirement could be financially disastrous for people who do not qualify for the state pension. As the amount received exceeds the cost of National Insurance contributions, payees benefit more than those who avoid it.
Don't only rely on selling the business
Managing to sell a business could provide a very comfortable retirement, but it is not sensible to rely on that looking forward. It could be that the business's sector collapses and no one wants to buy it; even in a strong economy it can take a long time to find a buyer and because prospective new owners will want to pay as little as possible there's the risk that a retirement-worthy price cannot be had. Even in the instances where a buyer is willing to pay a good price, the process can take a long time or fall through completely, and fees for the professionals helping the sale need to be factored in too. Put simply, selling a business can certainly be a part of a retirement plan and the money can contribute to financial security, but putting all your eggs in one basket could backfire.
This may sound facetious, but it's the most important point of all. The best savings option and the best financial advice are irrelevant if no money is going into the account - interest only accrues on money, not on a zero balance. It's important to remember that although it's better to save a little bit than nothing, putting £10 away each month is going to have minimal impact, while putting £200 will be significantly more rewarding. Everyone's income and outgoings are different so it's not possible to say what is required, so it pays to work out what will be needed in retirement and how much can be put away each month. To help with this, the Money Advice Service has a free retirement planning tool.
Retirement can be daunting, but it needn't be as difficult as it may seem: early and sensible considerations combined with seeking impartial financial advice can help everyone get to grips with theirs.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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