Saving to skip off into the sunshine
When you’re self-employed, it can be a real struggle choosing a pension – whereas employees have it easy.
I wrote an article for last weekend’s Sunday Times about how to save for a pension if you’re self-employed, because the number of self-employed people paying into pensions has plummeted in recent years, from 950,000 to 350,000 in less than 10 years, according to HM Revenue & Customs. This is in stark contrast to the soaring numbers of employees signing up. Overall, the Financial Conduct Authority (FCA) found that half the self-employed don’t have any pension beyond the state pension – compared to just a quarter of employees.
Related post: What is a pension and why you should care
What causes the difference? Emma, who volunteered to be the case study for my article and blogs over at Emma and 3 and Mum’s Savvy Savings, just didn’t know where to start. I reckon a lot of it is down to purely practical reasons
Employees don’t need to lift a finger…
If you’re an employee, starting a pension is as easy as doing absolutely nothing at all.
Nowadays, thanks to auto-enrolment, your boss has to sign you up for a pension if you earn enough, unless you actively choose to opt out. Your boss then automatically bungs some of your pay packet into a pension and even has to add extra money on top, as employer contributions.
Most employees don’t even bother selecting a fund for their retirement savings. Despite the choice on offer, an overwhelming 88% of employees just stick with the one-size-fits-all ‘default fund’, according to IPSE, the Association of Independent Professionals and the Self-Employed.
Now, there’s a whole debate about whether employees should actually be paying more into their pensions (yes), or saving elsewhere (maybe), or opting for alternatives to the default fund (probably yes). But fundamentally, if you’re an employee, do nothing and you’ll still be stashing some cash towards your retirement. Woo hoo!
…whereas the self-employed face bewildering choices and tricky finances
If you’re self-employed, you have to do it all yourself.
No boss to choose your pension or pay in money on your behalf.
Just a bewildering choice of pension companies, platforms and gazillions of funds and shares.
You have to do the research or find someone you trust to help – and pay the bill for independent advice. You have to choose when and how much to pay in, faced with unpredictable earnings and unexpected bills.
Now, the great thing about pensions is that the Governemnt is willing to pay hefty bribes to encourage people to save for their own retirement. The drawback is that you can’t touch the money until you’re at least 55.
If you’re self-employed with uncertain cash flow, it’s easy to see how the effort of choosing a pension can slip way down the ‘to do’ list. With the best intentions, years can slip by without setting up a pension – and the longer you delay, the more you will miss out.
The cost of delay
Delay in setting up a pension unleashes a triple whammy of financial damage: less free money as tax relief, less time to pay in and less time for the money to grow.
I’m keen on grabbing that free money from tax relief. For every £100 a basic taxpayer pays into a pension, you get an extra £25 added. If you’re lucky enough to be a higher-rate taxpayer, you can then claim another £25 back from your tax return, or £31.25 for additional rate taxpayers.
Starting a pension earlier, even with small contributions, can put thousands more pounds in your pocket.
For example, a 25-year-old paying £200 a month into a pension, increased to £250 by tax relief, will accumulate £706,261 when retiring at 68, according to calculations by Fidelity International. This assumes annual contributions rise by 3%, and the pension grows 5% a year after costs.
Wait until 45 however, and the pension pot will be significantly smaller, at £169,118. That’s a huge difference!
What on earth to choose?
One of the money questions I get asked most often is by self-employed people concerned that they need a pension, but don’t know where to start. Check out my Sunday Times article to see which companies the pensions experts recommended.
My own top tips on pensions for the self-employed are:
- Just start. Pick a company, doesn’t have to be the perfect option or the perfect fund, just get started. You can always move your money afterwards!
- Look at the costs. The longer you save and the bigger your balance, the more the fees will make a difference. With pensions more than any other investment, you could be saving for so long that the odd 0.5% here or 1% there can really add up and gouge a huge hole in your retirement savings. Fees to look out for include:
- Any initial fees, charged when you pay money in
- Platform fees, for the company that runs the pension
- Fund fees, for the specific funds you use with your pension
- Any exit fees, if you move to a different pension provider
- Top up with lump sums. If you are concerned about paying a big chunk into a pension each month when your income varies – don’t. Perhaps pay less each month, but then add occasional lump sums. I wait until after I’ve paid my tax bill at the end of January, and then pay a chunk of money into my pension when I’m sure I can afford it. Remember, taxpayers can claim tax relief on contributions up to 100% of earnings during a tax year, capped at a maximum of £40,000. People who have already joined a registered pension scheme can make even larger contributions when times are good, by carrying over any unused allowance from the previous three years. Even more reason to open a pension right now!
- Save somewhere else. If you don’t fancy pensions with all the rules and regulations, fair enough. But pay into an alternative – individual savings accounts, buy to let or whatever else. Banking on your own home or your own business might not be the best plan. You’ll always need somewhere to live, and not all businesses succeed long term, so do set aside other money for your financial future.
- Seek advice. OK you might have to pay for financial advice, but can you afford not to? You can track down professional advisers in your area via Unbiased.co.uk (affiliate link) and even ask for a free half-hour pension check (affiliate link). The Pensions Advisory Service and (for over 50s) Pension Wise also provide info on pension choices for free – but you’ll need an adviser if you want recommendations for specific pension companies and funds to suit your circumstances.
Now – over to you. If you’re self-employed, do you pay into a pension? Or are you stumped about where to start? Do share in the comments, I’d love to hear!
Pin for later:
very good. Thank you for sharing!
Good informative post, but I think to increase pension contributions by 3% (Fidelity reference) per year will be unreasonable with many people’s pay rises reaching nowhere near that. We have been getting 1-1,5% a year for ages, and some local Government workers have had no rise several years running.
A tiny pension which I paid into for a very short time will yield (at age 65) just £15 a year – I’d need to live until I was 92 to recoup the whole pot! Unless the rules change, I won’t be able to get it in one payment either, because I’ve already commuted the maximum.
personally, if I was starting out again, I’d put my spare cash into buying an investment property instead.
Hi Eloise – Thanks a lot your comment, glad the post was informative. Are you looking at buying an annuity with your tiny pension? Appreciate rates are rubbish right now. Guessing you could still take out the first 25% tax free. I’ve got keener on pensions since the rules changed and the rest of the money can stay invested, and withdrawn as and when needed, rather than being forced to buy an annuity. Do agree it’s worth looking at different options to fund retirement. I’m intending to use a balance of pensions (glad to get the boost from tax relief), ISAs (accessible earlier if needed, and tax free when spent) and buy to let.
After several months of trying to make sense of it all I did as you suggest and just got started. I’m 27 and I’ve been paying into a pension with Nest since March of this year. I only pay in a small amount at the moment to suit my income, but will be doing a lump sum soon to help it out a bit like you say! What I did discover when I was researching, is that no option is “the best” or certain to give you a secure retirement, so I’m going to look at a couple of other options too to make sure my pension has some variety. Lifetime ISA and Stocks and Shares ISA are top of my list!
Brilliant that you’ve got started! It’s tough making the choice, lot of info to take in. Great point that no option is “the best”. If you’re under 40 and a first time buyer, then a Lifetime Isa is a great way to get extra money from the Government.
Hi Faith, thanks for this post – it’s super useful. I must admit that a pension is something that I’ve sorely neglected, and it’s on my list of things to get sorted ASAP. I’m bookmarking this post and I’ll definitely be coming back to it soon!
Brilliant, glad the post is useful. I really think it’s worth starting a pension sooner rather than later, to grab the free money and benefit from a longer time for your pension pot to grow.
DO YOU NEED A LOAN? We give out loan to private and corporate individuals. Have you been turned down by so many banks? Do you need finance to establish your business? Do you need a financial loan for the expansion of your business? Or do you need a personal loan?Our loan ranges. From personal to business loans. Our interest rate is very affordable and our process is very fast as well. We are very willing to make all your financial troubles a thing of the past. If you are really ready to get your financial problems solved, search no further and apply for a loan today, contact us via email at netcreditloanservice@gmail.com
Hi Admin
How will the Coronavirus Pandemic affect my Pension?
I found this article very informative .Looking forward for more informative articles like this related to Gutter Cleaning
I found this article very informative. Looking forward to more.
Good post!
A human being is a part of the whole called by us universe, a part limited in time and space. He experiences himself, his thoughts and feeling as something separated from the rest, a kind of optical delusion of his consciousness.
I really liked this user’s article and I would like to advise you on a great site that will help you write articles and essays.
Those who dream by day are cognizant of many things which escape those who dream only by night. In their gray visions they obtain glimpses of eternity, and thrill, in waking, to find that they have been upon the verge of the great secret. In snatches, they learn something of the wisdom which is of good, and more of the mere knowledge which is of evil
But if you believe yourself worthy of the thing you fought so hard to get, then you become an instrument of God, you help the Soul of the World, and you understand why you are here.
Great article!
I just want to say Thank You to everyone who supported me through the years. My name is Manuel Franco, New Berlin, Wisconsin. My story of how I won the Powerball lottery of $768.4M is a bit of a tale. I have been playing Powerball tickets for 6 years now since I turned 18. I bought my first ticket on my 18 birthday. I was feeling very lucky that day because I had contacted Dr. Odunga Michael to help me with the winning Powerball numbers. I really had that great great feeling that I looked at the camera wanting to wink at it. I only did a tiny part of it and trusted him. He gave me the numbers after I played a couple other tickets along with it for $10. I checked my ticket after the winnings came online and saw the numbers were correct including the Power play. I screamed for about 10 minutes because it felt like a dream. I had won $768.4M. You can check my winning testimony with the lottery officials just with my name search. Thank you Dr Odunga. Well, his email is odungaspelltemple@gmail.com and you can also call or Whats-app him at +2348167159012 so you guys can contact him
Real spell casters are hard to find but I am happy to thank Lord Krish for helping me win the lottery successfully after trying so many spell casters and I found my happiness in Lord Krish. I was given the lottery numbers by him which made me the third highest lottery winner in history and this is all thanks to you sir. Winning the lottery is something everyone would like to feel especially with a trustworthy spell caster. I, Yanira Alvarez, won the Powerball lottery in Los Angeles and I really thank Lord Krish because after I contacted him, he told me to only provide the spiritual items for him to do it for me and I didn’t hesitate to give him what he required so I could win it. I have tried so many spell casters who seemed real but only Lord Krish numbers gave me the winnings. I won the Powerball Jackpot of $1.08 billion and I am here today to share my experience to those willing to win the lottery as well. Take this opportunity to contact Lord Krish Spiritual with his email: lordkrishshrine@gmail.com and also share your experience with others.
Hello everyone here, i am happy to inform you that Mighty yuri is a trusted platform where lost usdt and cryptocurrency can be recovered back, they assited me to get back $95,000.00 lost USDt i invested to a scam company which claimed they could help me trade and give me back my interest, they robbed me off my money, but all thanks to Mighty Yuri i am happy and glad now that i have my USDT i lost to them back. Mighty Yuri has the tool to help you invest your crypto, and they can also help you recover any money you lost to cryptocurrency scam, you can contact the Mighty Yuri
via
WhatsApp: +1,619,50,06,894
Email: mightyyuri(@)consultant.com
web: https://mightyyuri9.wixsite.com/mighty-hacker-yuri
Wow! Thank you! I always needed to write on my blog something like that. Can I take a part of your post to my website?
I like the helpful information you provide in your articles. I will bookmark your blog and check again here frequently. I’m quite certain I’ll learn many new stuff right here! Best of luck for the next!
Simply wanna comment on few general things, The website layout is perfect, the articles is real fantastic : D.
You have remarked very interesting points! ps nice web site. “‘We’re always lucky,’ I said and like a fool I did not knock on wood.” by Ernest Hemingway.
You could definitely see your enthusiasm in the paintings you write. The world hopes for even more passionate writers like you who aren’t afraid to mention how they believe. All the time follow your heart.
This is a topic close to my heart cheers, where are your contact details though?
Hey very cool web site!! Man .. Excellent .. Amazing .. I’ll bookmark your site and take the feeds also…I am happy to find a lot of useful info here in the post, we need develop more techniques in this regard, thanks for sharing. . . . . .
Nice post. I was checking continuously this blog and I am impressed! Very helpful info specifically the last part 🙂 I care for such info a lot. I was looking for this particular info for a long time. Thank you and best of luck.
I genuinely appreciate your piece of work, Great post.
Magnificent beat ! I wish to apprentice while you amend your web site, how can i subscribe for a blog web site? The account helped me a acceptable deal. I had been tiny bit acquainted of this your broadcast provided bright clear concept
whoah this blog is excellent i love reading your articles. Keep up the good work! You know, a lot of people are looking around for this information, you can help them greatly.
I haven’t checked in here for a while since I thought it was getting boring, but the last several posts are great quality so I guess I will add you back to my everyday bloglist. You deserve it my friend 🙂
Thanks , I’ve just been looking for info about this subject for ages and yours is the best I have discovered till now. But, what about the conclusion? Are you sure about the source?