Working for yourself means freedom. No boss breathing down you neck.
It can mean real rewards. The harder you work, the more success you may be able to enjoy.
But it does not mean the security that comes with being an employee. You might feel comfortable trading paid holidays and sick pay for the satisfaction of being your own boss and doing the work you love in the way you want, but the rewards, flexibility and freedom come to an abrupt end when you stop working.
No matter how much you love your own business, you probably don’t want to work until you drop, even if you were physically capable of doing so.
You need a pension.
But a recent report by Scottish Widows found that four in 10 self-employed people will not have even a minimum standard of retirement living, equivalent to £14,400 a year for a single person.
A retirement you can look forward to?
If you are self-employed you are entitled to the state pension, but since 2016 it has been entirely based on your National Insurance record.
You'll usually need at least 10 qualifying years on your National Insurance record to receive any state pension, and at least 35 qualifying years to receive the full amount, currently £221.20 a week.
This is unlikely to be enough. The Pensions and Lifetime Savings Association says a moderate retirement income for a single person is £31,300 a year, nearly £20,000 more than the state pension provision. A 'comfortable' retirement for a single person would take an income of £43,100 a year or £59,000 for a couple.
Entrepreneurs often plough every spare penny into their business to help it grow, and schedule thinking about the future for when that future comes.
But although they might have some idea of selling their business when they retire and think they don’t need to worry about paying into a pension, it is a risky tactic. The business could fail to sell or go bust.
You need to set up a private pension. And you need to do it as soon as possible. Time is money – the longer your pension savings have to grow, the more it could potentially grow.
And what’s more, it can mean getting at least some of your money back from the taxman.
The tax advantage of a private pension
Your business may make you wealthy. Putting money in an ISA or investing in buy-to-let may build a tidy sum over the years. But pensions are designed for retirement, and to encourage you to save for your future, the government has provided some powerful tax incentives – which mean when you save, the taxman saves with you.
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 potentially be a very good investment, and possibly the best you will ever make.
But if you are your own boss the benefits don’t have to stop there.
By paying your pension contributions from the profits of your own limited company business, you can reduce your taxable profits and save corporation tax. If you choose a Self-invested Personal Pension or SIPP, you can have 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. Under certain circumstances this can include your own business. SIPPs, like any investment, carry a degree of risk. The level of risk largely depends on the investments you choose within your SIPP and are generally suited to knowledgeable investors.
Getting started
Time is money, and the sooner you start setting up your pension the more time it has to potentially grow.
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 that is appropriate for you, 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.
Latest Retirement Living Standards show change of UK public expectations | PLSA
How to set up a pension pot if you are self-employed - and why it's important | This is Money
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement or investment strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment; the fund value can go down as well as up and this can impact 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.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
The Financial Conduct Authority does not regulate taxation advice, UK Government securities and some aspects of Buy to Let mortgages.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested.
