If you work for yourself, you lose out when it comes to pensions in two ways: firstly, you don’t get employer contributions and secondly, as your income is normally unpredictable, you may find it harder to set aside money. But we all need something to live on when we retire, whether we’re employed or we work for ourselves. So, saving into a pension is a good idea for most self employed people.
I asked four financial planners – who have signed up to SavvyWoman’s directory – to give me their tips on how to save for your pension if you’re self employed. Here’s what they said:
How to start a pension if you’re self employed
Tina Weeks, Financial Life Planner and Director of Serenity Financial Planning says that your pension shouldn’t be at the bottom of the list: “When you are self-employed you are responsible for your own pension provisions and it is important that this area of your financial planning is not neglected.”
Rebecca Aldridge, Balance: Wealth Planning, based in Nottingham adds: “When you’re self employed it can be difficult to know where to start. You need to find a pension plan and then decide how much to pay in.”
Anna Sofat, founder of Addidi Wealth agrees, but says that a pension should be treated as another business expense: “Many self-employed people do not make provision for their pensions as it is seen as a cashflow drag and the intention is usually to get round to it when finances are better placed. Often this just does not happen, year after year. So, my advice is to treat a pension contribution as a tax liability and set aside a percentage of your earnings from day one. So, as well as the tax, put aside a further percentage (minimum 3% to 10% as a norm) for your pension. This way there is the discipline of saving from the beginning and it soon just becomes another overhead which has to be met and factored into your pricing.”
Anna Sofat says that to ensure it’s affordable and to help with cashflow, you can keep it in the same bank account as your tax liability – or a separate bank account – and at the end of the tax year, decide where you want to move the money. “You can put it into a pension – which is a long term saving product you cannot access before you’re 55. But there are alternatives. You may prefer to put the money into a stocks and shares ISA, which is medium term saving earmarked for your retirement but accessible. You can always move this money into a pension at a later stage when your finances can enable you to commit to long term. If you’re worried about tying up your money, you can put it in a cash ISA which can remain available at short notice but is ring fenced and can be converted to a stocks and shares ISA or a pension at some future date.”
Sole trader or limited company?
Janet Van Der Hoven, a financial adviser with The Private Office says that there are different ways that you can contribute to a pension, depending on whether you’re self employed or you have a limited company. “Sole traders can make individual contributions for themselves and their relevant UK earnings will be their pre-tax profits declared to HMRC in the current tax year.”
Janet Van Der Hoven explains:
- A sole trader can make employer contributions in respect of any employees but not for themselves. These contributions will also be tax relievable as a business expense against pre-tax profits subject to the ‘wholly and exclusively’ rules.
- If your business is incorporated as a limited company, you have the ability to make employer pension contributions from pre-taxed company profits into a pension up to the annual allowance, which is currently £40,000 a year, or 100% of your earnings, whichever is lower. You may also be able to ‘carry forward’ unused allowance from the previous three tax years.
- Provided that employer pension contributions are ‘wholly and exclusively’ for the purpose of the business, they can be treated as an allowable business expense and offset against your company’s corporation tax bill, saving up to 19% in corporation tax.
- In addition, employers don’t have to pay National Insurance on pension contributions, therefore you can save an additional 13.8% in the current tax year.
Choosing a pension
Rebecca Aldridge, Balance: Wealth Planning: “When it comes to choosing a pension, remember that they are all pretty similar. Think of the pension plan itself being like two bits of bread making up an empty sandwich. You decide how much filling you put in (money). And you decide what the ingredients are (investment funds). Most pension plans will have a lot of investment funds to choose from and, just like sandwich ingredients, some will be more to your liking than others. Some will be high risk, some low, and plenty in between.”
“There are pension plans you can find advertised online from lots of big companies. It is the investment funds, the filling, that needs the greatest thought.”
Tina Weeks, Financial Life Planner and Director of Serenity Financial Planning: “If you are not going to be using a financial planner to help you, you will need to do your own research. The internet is a great place to start and searches such as ‘ Best personal pensions’ or ‘Top pension providers’ are very helpful. You can then filter down by comparing charges, minimum contribution requirements, flexibility (can you stop and start, can you amend your contribution easily) and fund choice.”
Costs and charges
Rebecca Aldridge, Balance: Wealth Planning: “The cost will also vary between them. My advice is generally to choose funds that are very well diversified, so they include lots of different types of investment, in different geographical areas. And also to keep the costs down as much as possible. These are all factors that contribute towards you getting the best return while still taking a comfortable amount of risk.”
Regular payments or lump sum?
Rebecca Aldridge, Balance: Wealth Planning: “When you’re self employed your income will be quite bumpy and you may not know what your profits are until close to the end of the tax year. Pension contributions help reduce the tax on your profits, so it’s often a good idea to make contributions at the end of the tax year. But it’s good to have the discipline of paying a regular amount in too. I usually suggest a low monthly amount goes into a pension for my self employed clients, and then that gets topped up at the end of the tax year, depending on how profitable they have been and how much cash is available at the time. That way you have the discipline but you aren’t over committed and you have some valuable flexibility.”
Janet Van Der Hoven, from The Private Office: “The benefit of a lump sum contribution is that your investment is immediately exposed to the market and has greater potential for growth. However, the problem with lump sum investing is the timing risk. If you invest a lump sum and markets are rising then so will your returns, but if markets are falling you could lose a proportion of your lump sum investment, which may take some time to recover. On the other hand, investing a small amount regularly allows you to smooth out and benefit from market volatility over the long term because it enables you to buy units more cheaply on average, which is known as ‘pound cost averaging’.”
“Regular contributions help you to establish a savings discipline and smooth out cash flow, and you still have the ability to make a lump sum contribution towards the end of the tax year if appropriate. The important thing is to make the step to start saving for retirement.”
Getting your retirement plan sorted
Tina Weeks, Financial Life Planner and Director of Serenity Financial Planning. “Getting advice and help around your financial planning is invaluable. It allows you to be very clear about your current situation and exactly where you are heading. Your adviser will help you make some of the really important decisions, such as how much should I contribute, what is the most tax-efficient way to save for my retirement and how does my retirement planning fit in to my overall financial planning?”
Rebecca Aldridge, Balance: Wealth Planning: “It’s vital to know why you’re even thinking about putting money into a pension. Are you doing it because everyone else is? Because your accountant told you to? Or do you know that you need to build up a certain amount of wealth before you can retire comfortably? It’s really important to have a clear plan, as this will dictate whether a pension is the right savings plan at all, as well as how much should be saved.”
You can find out more about the financial planners who’ve provided information for this article, in the SavvyWoman directory section on financial planning and advice. Janet Van Der Hoven of The Private Office, Tina Weeks of Serenity Financial Planning and Rebecca Aldridge of Balance:Wealth Planning will all be speaking at our fantastic event called ‘How to find a great financial planner‘. It’s on November 20th and we’d love to see you there!
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