Self-employed? How to trust the power of your pension

Would you give up work if you won big on the lottery?

That’s what I asked my younger brother recently. “Absolutely! He replied, “Then I could do something that I really love.”

And then he said something quite woeful.

“Being self-employed though, I’ll probably never be able to give up work because I’ll never have a pension.”

As much as my brother is a pain in the neck at times, this made me feel sorry for him. And then I got shot down.

“I don’t trust them. I don’t have the luxury of an employer matching my contributions, like you do. And how do I know if the money that I’ve put in will be worth the same amount as when I go to get it out? And don’t forget, they aren’t really affordable for people like me. What happens if I can’t get as much work one month and my pay drops?”  

Let’s just say, the conversation got a bit heated!

It got me wondering though. For someone who is a savvy saver already, surely can’t he see what he’s missing out on by not having a pension?

Especially when your pension is one of the most powerful saving tools there is. You’re probably thinking, of course we would say that! We can show you why and we’ll get to that in a bit.  

To trust or not to trust?

It appears my brother isn’t the only self-employed person to not trust pensions.

Recent statistics show that self-employed people lack confidence in pensions, partly because of questions of their affordability. 1

And then there’s the question of security with only 28% of people who are self-employed believing pensions to be the safest way to save, compared to 52% of employees. 2

The most concerning statistic is that almost half (45%) of self-employed workers aged 35 to 54 have no private pension at all, compared with around 16% of employees. 3

And that’s a lot of people who are missing out on the power of a pension. I know it’s the second time we’ve said this and now we can show you where that power lies.

Why you should embrace the power in your pension

There are two main points of power in your pension that give you a big advantage over many other ways of saving and can significantly boost the value of your money.

Compound Interest

Compound interest is something that’s too big to ignore! And understanding what it is and how it can benefit you, could mean being one step ahead of your peers.

Compound interest is simply this. When you save money, it will generally earn interest. This interest will then earn more interest.

For example, let’s say from the age of 25 you chose to put in £20 in a jar each month rather than a pension. Money in a jar doesn’t benefit from interest and by the time you reach 65, you’ll have £9,600.

Put it into a savings account with an interest rate of 0.5% per year and you’ve got over £10,625 by 65.

Now, if you chose to save that £20 into a pension growing, on average at 6% per year*, by 65 you’ll have £38,000.

The point is, the average investment growth, AKA interest you get in your pension tends to give you more opportunity for your savings to grow, which massively boosts the power of compound interest.

Tax Relief

When you make a contribution to your pension, the government automatically adds the 20% that is usually deducted from your earnings. This will be 40% or 45% if you are a higher or additional rate tax payer.

For example, if you add £80 to a savings account or ISA, it will be worth £80. Yet, if you add £80 into your pension, the government will top this up to £100.

So essentially, tax relief is cash back you wouldn’t normally get.

It’s worth bearing in mind that all tax information is subject to change depending on legislation and individual circumstances.

And there are three other things that you may want to think about when it comes to trusting the power of your pension.

Take back even more control

Being self-employed, you’re probably in control of a lot of things that most people could only ever dream of.

Yet saving into a pension could help you take back even more control in the future, because if it’s properly managed, you could have more money and that means more freedom to do the things you want to do.

You may not qualify for a full State Pension

Frustrating as it sounds, you may not qualify for a full State Pension if you’re self-employed. This is because you are paying different National Insurance classes compared to those who are employed.

If you take advantage of the power your pension gives you, you could be in a position where you won’t have to rely as much on the State Pension in the future.

Don’t always pay attention to doom and gloom headlines!

There have been a lot of news recently of the markets being particularly temperamental. It can cause a lot of worry and it maybe affects people’s trust in things that rely on stock markets such as pension.

The thing is, going up and down is what markets do and recent activity is essentially business as usual. History shows us that stock markets work over the long term. That’s why the best thing to do is pay little attention to the noise of short term headlines and trust decades worth of research.

How do you harness that power?

The first step would be to check your pension.

And if you’re around the age of 35, it’s likely you’ve had a few jobs with pensions attached to them.

At this stage, it’s all about finding out where you currently stand with your pension and what it could mean for you in the future, if properly managed.

We can do all of this for you with our no obligation pension review which is much less formal than it sounds! Take a look at our quick video to see for yourself.

Why your pension holds the power to a better future

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Quick and easy guide to no obligation reviews

Watch our video on how a pension review works.


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Important Information

*Based on an assumption of 6% growth per year.

1 Pensions Expert, Online – Self-employed do not trust pensions, experts say, 27 March 2018.

2 Pensions Expert, Online – Self-employed do not trust pensions, experts say, 27 March 2018.

Citywire, Online – Five stats that show why we need a self-employed pension solution, 28 February 2018

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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 here.

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