Paying into your pension while you’re working will determine how comfortable your retirement is.
It’s easy if you are an employee. Under auto-enrolment rules, employees pay a minimum of 5% of their earnings into a workplace pension scheme, with at least 3% from their employer, and you can contribute more – your employer might even match it
But what if you don’t have an employer? How can you save for your retirement if you are self-employed?
If you are your own boss, there are plenty of demands on your money now, and it is all too tempting to leave the future to look after itself.
But if you have not made the right decisions while you are work, you might find you can’t afford to stop.
It does not have to be that way.
Yes, you may get a state pension
You will qualify for the state pension, currently worth a maximum £221.20 a week (or £11,502.40 a year).
You’ll need 35 years of National Insurance Contributions (NICs) to get the full amount. If you end up contributing less than that, but have at least 10 years’ of NICs, you’ll get a smaller pension.
Its not a bad start for your retirement income. But the state pension alone is not sufficient to achieve a comfortable retirement. You will need extra income on top, and if you are self- employed, that will need to be through a private pension.
Why a private pension exactly?
There are many ways to build cash for the future. Putting money in an ISA or investing in buy-to-let could build a tidy sum over the years. But pensions are designed for retirement, and come with free cash from the government in the form of tax relief.
Basic-rate taxpayers receive a 20% top-up, higher-rate taxpayers get 40% and additional payers get 45%. Because money invested in a pension fund gets this boost from the government, it has already started to grow even before investment and compound interest go to work for you.
So a private pension can be a very good investment, and possibly the best you will ever make. But what kind of pension do you need?
Stakeholder Pension Plans are an affordable solution for pension saving. They have low flexible contributions, so if it’s a slow month you could skip a payment. You won’t have to make any other decisions; your money will be managed and invested for you.
Personal Pension Plans have higher charges than Stakeholder schemes, and probably a minimum contribution of at least £100 per month. They offer a choice of investment funds run by the fund managers giving you some control over your money.
Self-invested Personal Pensions– SIPPs provide the freedom to put your contributions to work in investments that you select. Shares, unit trusts, investment trusts, gilts and corporate bonds, exchange-traded funds and even commercial property can all be investments in a SIPP.
Think of a SIPP as a do-it-yourself pension investment. You'll have to take responsibility for selecting and managing your own assets, although many SIPP providers can offer help and support, and some even provide ready-made portfolios for your investment. Going ‘execution-only’, which means you take no advice from the firm, can make the charges lower.
And here’s what could be a very good reason for using a SIPP. You can invest almost anywhere you like. Under certain circumstances this can include your own business.
Investing your pension in your own business is not for the faint-hearted, and it should not be your only investment. But in the right circumstances, it could boost your business now as well as boost your prospects for the future.
Getting started
Time is money, and the sooner you start putting money into your pension the more time it has to grow.
But all pensions are not created equal. There are many providers, not just with different fees, but with different charging structures that can make comparisons difficult. You may be charged a fixed annual administration fee or an annual platform fee, as a percentage of the amount you’ve invested. Some companies charge both.
Choosing the type of pension you need, the most suitable provider for it and the level of contribution you need are all vital. Expert help is essential.
To get it, simply call us at Continuum.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
Pension savings are at risk of being eroded by inflation.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
When investing your capital is at risk.
Your property may be repossessed if you do not keep up repayments on your mortgage.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable pension plan, you should seek independent financial advice before embarking on any course of action.
