It seems the growing army of self-employed workers are ignoring pensions.
New research from the Resolution Foundation has shown there are now 4.5 million self-employed people in the UK. Alarmingly though, two–thirds of newly self-employed people are not paying into a pension.
Despite having a somewhat tainted reputation, whether you are newly self-employed, or have been working for yourself for years, there are some very good reasons why you shouldn’t dismiss pensions.
Here are six:
1. You’re on your own!
Millions of employees are due to be automatically enrolled into pensions over the next few years. Whilst they will have to pay in, they will also receive contributions from their employer and the Government in the form of tax-relief.
As a self-employed person you are on your own, no employer will pay in for you, in fact if you employ staff you will have to automatically enrol them and make contributions, but that’s another story!
Ok, so you’re not completely on your own, if you retire after 2016 and have paid National Insurance for 30 years you will get the new flat rate State Pension. But that’s it, if you want an income of more than £155 per week; it’s down to you to create it.
2. Your business might not be your pension
We often hear people say that that “their business is their pension.”
This could well be true, you might sell your business when you retire and invest the profits to provide a comfortable retirement. But it’s important to differentiate those people who are building a business, which could be sold, from those who are simply self-employed.
Ask yourself some tough questions. Do you really have a business which is saleable? How much will the business be worth if you have to sell during a recession? What’s your back up plan if the worst happens and your business fails?
Having a separate pot of money, perhaps in a pension, an ISA, Buy to Let properties, or a combination of all three is a sensible back up plan, in other words, don’t put all your eggs into one basket!
3. Reduce your tax bill
Whether you are self-employed or run a limited company you will hopefully be making a profit each year. The question then arises how to get that profit out of the company whilst paying as little tax as possible.
You will pay income tax on income you take from the business, whether it’s a salary or dividends, and you may also have National Insurance costs too.
One tax-efficient way of taking money from your business is to pay into a pension, which is effectively treated as an expense, giving you corporation tax-relief on contributions.
Of course the money is tied up until you are at least 55, but it’s there to provide an income for you in later life. What’s more if you die beforehand can be left to your spouse, partner or other financial dependents and with the new rules you will have even greater flexibility on how you take money from your pension when you retire.
4. Your pension could help your business
For most people a pension is a tax-efficient way of building up a pot of money they will use when they retire.
For business people though a pension can have other benefits. We’ve already shown that it can be an excellent way of moving profits and cash from your business in a tax-efficient way, but it can also help your business. Two quick examples:
- Rather than paying rent to a landlord, many business owners have used their pension to buy premises to trade from
- We’ve also seen business owners borrow money from their pension to help fund their business
Of course there are downsides, especially if your business fails, but for many business owners a pension is equally about the benefits now, as much as it is about providing an income in retirement.
5. Greater access
One of the reasons self-employed people have traditionally not paid into a pension, is the fact that the money is tied up and only 25% is available at retirement as a lump sum.
After the last Budget, and assuming the changes are implemented as proposed, this all changes from next April.
Whilst you will still only be able to access your pension from 55 at the earliest, you will no longer be limited to a lump sum of 25%. If you want to take more out you can, sure you’ll be taxed on whatever you take out above a quarter of the fund, but the days of limits and caps look to be numbered.
6. 40% tax-relief on the way in, 20% tax on the way out?
Only 1 in 7 people who are higher rate taxpayers during their working lives pay the top rate when they retire.
The benefit to you? Any pension contributions you make now, as a higher rate taxpayer, will attract tax-relief at 40%, but the income you take when you retire (up to a certain level) will be taxed at 20%, that’s pretty attractive for most people.
Couple that with the new rules allowing even greater access and we can see why pensions are set to get a new lease of life.
Pensions: Not the only option, but hard to ignore
If you’re self-employed and want an income in retirement greater than the State Pension, then you need to build it yourself.
Many self-employed people have dismissed pensions as too inflexible, expensive, and just “not for them”. If you are one of these people we’d suggest you take another look, they are not the only answer, but certainly have a part to play.
- Are you self-employed?
- Do you need help planning for your retirement?
- Have you got existing pensions which need to be reviewed?
Our team of Independent Financial Advisers are experienced in developing retirement income strategies for clients the length and breadth of the UK.
If would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email email@example.com