‘I’m 46 – with no pension’
‘It’s better to invest spare money than to overpay what is a very cheap mortgage’
Empowered by the internet and pushed by the financial crisis a decade ago, millions of us now work for ourselves.
Last year a record proportion of the workforce (15pc) consisted of self-employed workers. There are obvious benefits: working from home, taking time off whenever you like and no boss telling you want to do.
But freedom comes at a price, including the loss of perks offered by employers. Health cover and life insurance are typical employee benefits but it is pension contributions – now a requirement by law – that are usually the most valuable.
Workers’ contributions are typically matched by their company, giving the chance to build up large private savings to supplement the roughly £8,000-a-year income provided by the state pension.
An influential report into the “gig” economy published last month warned that the self-employed were saving too little and urged the Government to create new incentives for people to put money away for retirement.
Lottie Wride is caught in a classic bind. She runs a tree surgery business with her husband in Devon – the area with the lowest proportion of people saving enough for retirement, according to Scottish Widows, the insurer.
The couple have been selfemployed for most of their careers and neither has a private pension or any Isas. Their savings consist of £10,000 in a Tesco high-interest current account. Combined, their salaries are around £40,000 a year.
“When you’re self-employed it’s hard to prioritise,” said Mrs Wride.
“We’ve got three children and have concentrated on overpaying our mortgage, which we’ve recently fixed at 1.99pc for five years, and putting money back into the business.”
She wants to retire at 60 but at 46 is it too late for her to begin building up a pension to support herself?
Hayley North of Rose & North, a financial advice firm, said:
It is never too late to start saving. It’s important to strike a balance between protecting what you currently have, saving for the short-to-medium term and investing for the longer term. Right now Mrs Wride needs to prioritise investing for the long term.
She has already made good provision for the short-to-medium term with her cash savings but is worryingly short on longer-term provision. She is missing out on potential investment returns which could make retirement more comfortable and better provide for her children as they get older.
In order to provide financial security in retirement, Mrs Wride needs to consider investing in a range of different assets. These could include investments in pensions and Isas, property and cash.
In the current environment with inflation at 2.6pc (as measured by the consumer prices index), if a savings account is returning 0.5pc a year – a typical rate currently – you are losing money over time. In this case, only £3,000 of the £10,000 Mrs Wride has in savings is attracting a rate of 3pc (so a 0.4pc net real return); the remaining £7,000 is earning nothing. Many of these accounts with high “teaser” rates are great for day-to-day use but not sensible at all for saving or investing. Mrs Wride would be advised to save anything over £3,000 in an interestbearing account elsewhere.
It is reassuring that the couple have life insurance to protect their current mortgage. Should they buy a bigger property, they will need to ensure they increase the cover to match the new mortgage.
Mr Wride’s income is protected if he were to be too ill to work (although depending on when this starts to pay out, there could be a delay of a few months during which time they would need savings to live on) but on his death, even with the mortgage paid off, they are likely to have an income shortfall.
Considering “family income benefit” for each of them would be a good idea as this will ensure a regular annual income until their children are independent.
They are looking to buy another property, which would be excellent as another source of income, but they need to take into account the fact that buy-to-let mortgage rates are higher than on standard mortgages, bigger deposits are required and they involve tighter lending criteria. The couple will also have to pay higher stamp duty on a second property.
Relying on the state pension in retirement is unwise. Recently announced changes mean that neither of them will receive the pension until they are 68. At 60, Mrs Wride should have worked for 44 years and would qualify for the full state pension when she reaches 68. Her husband is 11 years her junior so has to wait even longer. When they both begin drawing the full state pension, they’ll receive £159.55 a week each or £8,297 a year, leaving them £23,407 short of their current annual income.
We would recommend stopping the mortgage overpayment and using this £150 a month to top up life insurance with family income benefit and then investing at least £100 a month into stocks and shares Isas that match their attitude to investment risk.
At a growth rate of 5pc net of fees annually, saving £100 a month now would give Mrs Wride £24,380 to use to supplement her retirement income at 60. The children would also benefit from stocks and shares junior Isas, as they too have long investment time frames and again would benefit from higher rates of growth.
Tom Kean of Thameside Financial Planning said:
Mr and Mrs Wride should reconsider where they save regularly. Instead of overpaying what is a very cheap mortgage, they could consider investing into an Isa and pension instead. It all depends on their expectation of future interest rates against the likely return from an invested fund.
If they aim to retire when Mrs Wride is 60, they’ll need to generate income, because they currently have no income-generating assets. They could downsize at some point, but that doesn’t sound viable given their three young children. So building up the value in their business and investing should be their priority.
Before they can begin investing they should pick a “platform”, or “fund shop”, which can be used to operate both pensions and Isas at the same time. There is a modest cost to holding funds on these platforms, but that is normally offset by the savings made.
For example, lots of funds have no entry costs if you’re using a platform. You can also switch between funds for free. And it’s the best way to access cheap versions of
funds negotiated by the platform.
For instance, the popular Woodford Equity Income fund, which I like, has an annual fee of as little as 0.65pc, depending on where you buy it, although fund shops levy their own charges on top.
Because Mr and Mrs Wride are relatively young I’d be inclined to suggest that new savings should go towards funding both pensions and Isas, and that they should take some risk – that means exposure to the stock market.
They already have a cash base, so taking risk now should work for them. A good mix of British and global stock market funds would seem to offer the best solution here. Our “adventurous” portfolios have a mix of funds including Investec UK Special Situations, Lazard Emerging Markets, Lindsell Train Global Equity, M&G Global Dividend, Marlborough UK Micro Cap Growth and Standard Life Global Smaller Companies.
Mrs Wride should be aware that the state pension is now payable much later in life. For her, this will probably be around 68 – assuming the Government doesn’t put the ages back even further.
Lottie Wride and her husband have ignored pensions in favour of paying down their mortgage and developing their tree surgery business