Personal finance clinic: why the self-employed can’t afford to delay their pension provision
Starting a new business can be exhilarating but exhausting.
It usually means long hours and hard work, especially in the early stages when you are busy trying to build your brand and attract customers.
Often, your own health will suffer as a consequence, both physically and financially. You put yourself last, but it’s crucial that you do schedule in some time for your personal and financial wellbeing on a regular basis.
Lately, I’ve been a guest speaker at an event set up for self-employed people and I spoke to them about how they can start saving for their retirement. It may seem like a long way into the future, but time has a habit of running out faster than you think.
The self-employed lag behind the employed when it comes to pension provision. This is hardly surprising when the government legislates for employers to auto-enrol the vast majority of employees. There is no similar legislation for sole traders, yet the same tax reliefs apply.
If you are a sole trader, you will receive a 25% uplift on personal pension contributions. In other words, put £100 into your personal pension and the government will top it up to £125. For those doing well enough to be paying tax at 40% or higher, you will receive a further 20% tax relief, or more, on contributions that fall within the higher tax brackets. Typically this is paid back to you via adjustments to your tax code.
Individuals who have incorporated will be potentially liable for corporation tax. In which case, you can make employer contributions to your own pension, which can be offset against any corporation tax due. Pension planning can be a useful tool for reducing tax, by making larger employer contributions at those times of year when your profits are higher.
Why hand over your money to the tax man when it can go into your pension instead?
Do be careful, however, to stay within your annual and lifetime allowances and to ensure that any employer contributions meet the ‘wholly and exclusively for the purposes of trade’ rule.
It can seem daunting to set up a pension. Where do you start? Which provider do you choose and what do you invest in?
What you should be looking for is a pension provider that is financially sound, is competitively priced and offers the features that you require. For example, if you can only afford to contribute £50 per month, make sure that you choose a provider that allows this. If you want to be able to access your account online, look for a provider with good IT features.
When it comes to investing, the length of time you have until retirement is crucial. The longer you have until you need to access the money; the more risk you can generally take with your money in order to give yourself more chance of generating a higher return. Having said that, if you are the sort of person that will check your account every day and panic if the value has fallen by 10% or more, then perhaps you want to choose lower risk investment options?
For people just starting out with a pension, you will be better off selecting funds to invest in, rather than investing directly into companies via shares. This is because you will gain greater diversity at a lower cost. There are thousands of funds out there to choose from, offering exposure to different geographical areas, industries and asset classes. For example, you could invest in UK companies, North American companies or pharmaceuticals. The choice is almost endless.
Other, more established self-employed people may be in a position to consolidate old pensions. In which case, if it is suitable to do so, they may elect for their pension to purchase their own business premises. It is even possible to take out a mortgage within the pension account and then have the company pay rent back to your pension.
If you are unsure about how to get started, speak to a financial adviser who can point you in the right direction.
The point is to get started. Don’t delay! You wouldn’t ignore the needs of your own customers and clients; so why are you and your family any less important? Time is ticking…
Lauren Peters, senior financial adviser at Fiducia Wealth Management, is a chartered financial planner. She also holds the pensions specialist and later life specialist qualifications. You can contact Lauren directly via firstname.lastname@example.org.
This article was also recently published in the Moulsham Times.
If you would like to know more about how we as Financial Advisers can help you set, plan and achieve your financial goals then financial planning section of our website: Financial Planning or send us email at: email@example.com
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