Tuck money away now
Almost half of self-employed workers are not saving for retirement
More than four million Britons are self-employed according to official statistics, but new research suggests almost half of them are not saving for retirement. A survey from CMC Invest reveals that 41% of self-employed workers are not paying into a pension, leaving them at risk of financial hardship later in life.
Self-employed people often struggle to save for the future. For one thing, they don’t have access to an occupational pension scheme provided by an employer. They may have less predictable income than someone who receives a regular pay cheque. They may simply feel they’re not earning enough to put money aside that they can’t dip into if needed.
The good news is that there are ways round these problems. Private pension plans are flexible, tax-efficient and affordable. Other taxefficient vehicles offer opportunities to make savings that can be accessed in an emergency. And the power of compound interest is that even small amounts of savings made today can grow into large sums over the long-term.
The most basic type of personal pension is a stakeholder plan, where providers are not allowed to charge more than 1% a year in fees. Many charge considerably less. These schemes will typically enable you to make lump-sum investments as and when you can afford to do so, or to set up regular monthly contributions if you are amenable to that. You’ll also be offered a range of different investment options.
Stakeholder plans can work very well. They are flexible, enabling you to change what you pay in as your circumstances dictate, and even stop paying in for a time if needs be. The low charges mean that fees aren’t eating into the value of your savings. However, these arrangements may also be somewhat limited. Stakeholder plans often offer fewer investment options, for example. Your choices about how you take income from the plans once you’re ready to retire may also be restricted.
A personal pension could therefore be a better option. As with stakeholder pensions, you are making regular contributions to a fund, which is invested to generate as large a pot of cash as possible by the time you reach retirement. But personal pension charges aren’t capped: providers are therefore able to offer more investment choice and greater functionality.
Self-invested personal pensions (Sipps) are particularly popular. Sipps put you in control of your pension investment strategy, maximising the investment options available. You can choose from a huge variety of investment funds, but Sipps can also be filled with individual shares and bonds, as well as other types of asset. All private pensions come with tax relief, so while self-employed workers miss out on pension contributions from an employer, they do get a top-up from the government. This is payable at your highest marginal rate of income tax, so paying £1,000 into a pension costs basic-rate, higher-rate and additional-rate taxpayers only £800, £600 or £550 respectively.
The downside to these arrangements is that money in a private pension can’t be accessed until you’re closing in on retirement. You can’t currently make withdrawals before you reach age 55. For self-employed people lacking other savings, that can be a worry – they need to be able to get at their cash in the event of a rainy day. In which case, an individual savings account (Isa) might be a better option than a private
“An Isa allows you to dip into savings when you need to”
pension. Isas are still highly taxefficient because while you don’t get up-front tax relief, there is no tax to pay on investment income and growth, or on withdrawals you make from your savings later on. But you can dip into the money if you need to – just remember that this will deplete the funds you have available for retirement.