Are you self-employed?
Top tips for getting your pension ready.
As the Federation of Small Businesses urges the government to create auto-enrolment pensions for self-employed individuals¹, Jamie Smith-Thompson, managing director at pensions specialist Portal Financial, explains how the self-employed can balance business growth with a solid retirement plan:
1. Seek financial advice
“Although this is important to everyone, it's particularly important for the self-employed because the auto-enrolment scheme is limited to those in regular employment. Thus, a retirement that doesn't depend on the basic State Pension requires, and an impartial financial adviser can explain all the available options, how they work, what fees may be involved, as well as any risks.”
2. Start early
“There's little sense in hoping to retire at 65 but waiting until 62 to start retirement savings. While putting money away as a teenager should result in a good sized pension pot thanks to decades of compound interest working its magic, this may not always be feasible. Nonetheless, the earlier you start saving, the bigger your pot will be. The 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
“Although it goes without saying that the more money you can squirrel away the better, even the smallest amounts add up. It's also worth remembering that, up to a certain limit, pension contributions receive a boost from tax relief, so for most people every contribution will get a top-up from HMRC.”
3. Pay National Insurance
“When you are self-employed there can be a temptation to prefer cash in hand, or have an accountant try to reduce the amount of tax you pay, but these can have consequences at retirement. As the State Pension is based on National Insurance contributions, retirement could be financially disastrous for people who do not qualify. As the amount received should exceed the cost of National Insurance contributions, payees benefit more than those who avoid it.”
4. Don’t rely on the sale of your business
“When building your business, it might seem like an attractive asset for your retirement, but it is not sensible to rely on just that as your pension pot. 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 you won’t receive a retirement-worthy price. In the instances where a buyer is willing to pay a good price, the process can still take a long time or fall through completely, plus 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 painfully.”
“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, but it pays to work out what you will need in retirement and how much you can put away each month.”
Retirement can be daunting, but it needn't be as difficult as it may seem: a bit of early and sensible consideration combined with seeking impartial financial advice can help everyone get to grips with theirs.
PR and Content Executive
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