‘I put it all into my bakery. I have no savings’

Luxury cake maker Chinelo Awa hopes it is not too late to start saving for her retirement. By Pieter Snepvangers

Chinelo Awa has spent seven years pouring her heart and soul into her baking business – but has badly neglected her pension and savings in the process.

The 36-year- old’s Battersea business, which makes luxury cakes for high- end clients, is forecast to hit £100,000 of revenue by the end of the year – a 54pc year-on-year rise.

But while the business is going from strength to strength, Ms Awa has a problem. Having devoted years to her baking start-up, she has not been contributing to a pension and has less than £10,000 saved in different pots from previous jobs. Besides bolstering her pension, she also wants to find £3,500 to finish her law school exams and qualify as a lawyer.

Ms Awa is able to draw a salary of £34,000 as an employee director. She is about to move into an upmarket apartment complex in Battersea. The rent for the one- bedroom flat costs £2,700 per month, but Ms Awa qualifies for an intermediate rent scheme because she works in the borough and she will pay £1,129 per month.

She has a Plum easy access savings account which is paying a competitive rate of 5.4pc interest. However, Ms Awa says the ability to draw on the money easily means she often takes money out of her account and reinvests it back into the business.

With no dependents (“not even a dog or a goldfish”) Ms Awa says she does not need much money. Having cleared £ 13,000 worth of debt, she wants to set aside £500 a month to build her savings and catch up on years of missed pension contributions.

James Jones-Tinsley

Self-invested pensions technical specialist at Barnett Waddingham Given the successful direction Ms Awa’s business is going, and the £500 a month she is able to save, I’d recommend finding a cost-effective Sipp and putting as much of that £500 into it as possible a month. There are plenty of Sipp options available these days with fees as low as just a few pounds a month, so it shouldn’t take too long to find something that works.

Any contributions made to this scheme will benefit from 20pc basic rate tax relief. So if she wanted to keep £ 100 aside for more accessible savings, she can still contribute £400 per month and HMRC will top this up to £500. This is a great starting point to create a positive savings habit, and build up her fund. And the benefit of a Sipp will mean she can save up to £ 60,000 gross per tax year, or up to 100pc of her earnings if lower, largely tax free under a pensions wrapper.

For the money she already has in a pension, I’m not sure what scheme she currently holds this in, but it may be worth revisiting the terms of the plan and – depending on any potential charges – moving this to a Sipp, too. Not only would this boost her fund, but will also make it much easier to track.

Now, it’s worth noting that a Sipp, although great for retirement, isn’t going to be accessible until later in life. So if Ms Awa wants to put £100 aside each month that is easier to get her hands on, depending on her goals, she might want to consider an Isa.

Cash Isa rates are great at the moment due to a higher bank rate, and have a £ 20,000 tax free savings allowance each year. If Ms Awa is feeling a bit more ambitious, a Stocks and Shares Isa could also generate her some returns, or if homeownership is on her list then a Lifetime Isa could be another option.

It’s also worth thinking about the future. If her business continues to grow – she may want to consider speaking with a financial adviser about opening a small self-administered scheme (SSAS). A SSAS is a great way to expand your business and grow your pension in a tax- efficient way, but you’ll need a decent pot before it makes sense to open one. While there are higher fees you need to consider, there are benefits it can provide you as a business director.

At the moment, Ms Awa is drawing a healthy salary out of the business. If she can make any contributions to her pension as an employer, this can be treated as a deductible business expense giving her further tax efficiency.

A SSAS can allow her to withdraw a loan from the fund to invest in her business – for example, if she needs to purchase new equipment, hire new staff, or needs funds for other growth projects.

Additionally, if she doesn’t currently own the premises her business operates from, she can purchase the property and keep it as a commercial investment within her pension – this means your commercial rent would go to your personal pension. If she really wants to better understand these nuances, the gov.uk website is littered with advice for small business owners.

Paul Derrien

Investment director at Canaccord Genuity Wealth Management

The Plum savings account is good. However, the income Ms Awa is receiving will be taxed if it is not in an Isa. Plum offers one of the highest rates at the moment for cash Isas, so she should be able to switch across to this instantly.

In terms of investing there are a number of potential solutions.

It looks like the funds will be surplus and can be invested for the long term and added to, so it would make sense to try to seek returns greater than those available from cash deposits.

This should be done in a way that she is comfortable with. All the investing can take place within an Isa and avoid tax and, therefore, finding an Isa that will take modest regular payments and invest them in a cost-effective way is paramount.

Providers AJ Bell and Hargreaves Lansdown can offer this service and AJ Bell also offers a range of risk- controlled portfolios that she could invest into depending on her overall attitude to risk – for both her savings and pension. If she used the same provider for the pension and Isa, she could have oversight of both in one place and be able to switch the risk profiles as and when required. She could also move some of the Plum cash into her Stock and Shares Isa to make it less accessible – albeit it will still be easy to access these Isa funds if circumstances change.

There are many alternative companies that offer a similar investment solution to AJ Bell. Most of the large asset managers such as Abrdn, Vanguard do, some of which provide a risk-profiling questionnaire to help guide investors to a specific risk profile and investment.

They are far from perfect, however. It would be sensible for Ms Awa to look at these as a check to see if their questionnaire outcomes align with her risk level or suggest that she is taking too much, or too little risk with any investment choices. The platform could also be used to make investments elsewhere – though this could work out a little more costly and this needs to be considered when making any choice.

Chinelo Awa’s business is going from strength to strength. She now wants the same success with her private finances