Small business owners are putting money aside into their savings at the expense of their retirement kitty, a new study suggests.
Auto-enrolment means many employees now build a retirement pot by default.
But if you’re self-employed, it’s up to you to start and contribute to one – and a survey by Workwell and the Association of Independent Professionals and Self-Employed People (IPSE) suggests many aren’t .
Only 51 per cent of those surveyed put money into their pension each month, while three in four regularly save in cash accounts, the study found.
Self-employed people put more money into their savings each month than into their pension.
A 2023 survey by Interactive Investor suggests this figure could be even higher, finding that up to three in four self-employed workers do not contribute to a pension.
While they may not have large retirement funds, nearly half of self-employed workers surveyed were debt-free and had paid off their mortgages, credit cards or loans, according to the Workwell survey. Around a third owed less than £100,000 in total.
Among those investing in pensions, the average monthly contribution is around £218, compared to £215 a month for cash accounts, £237 for Isas and £184 for other investment products.
Although it may not be as simple as automatic enrolment, there are good reasons to invest in a pension as a self-employed person, and it’s never too late to start.
Becky O’Connor, director of public affairs at pensions platform PensionBee, said: “I think most self-employed people are well aware that retirement planning is a small blip on the horizon for them, but few who feel capable of doing much to remedy it. he.
“Being self-employed can be exciting, so finding the time or inclination to think long-term, beyond what happens in the next few months, can seem difficult. »
If you’re self-employed and thinking about your pension, we explain why it’s important to start saving for a pension and how to do it.
Why save in a pension?
Pensions are the best way to save money for retirement. Even small monthly contributions can make a significant difference to your lifestyle in old age.
As well as the satisfaction of seeing your pot grow, you also benefit from tax relief on pension contributions.
For most people, claiming tax relief on their pension is quite simple. If you’re a basic rate taxpayer, you pay 20 per cent income tax on anything above the personal allowance (£12,570).
However, if you invest in your pension you are refunded the tax you have already paid.
For most people, that’s 25% more than what you pay. So if you invest £100 a month, you’ll automatically get £25 more via tax relief.
If you are a basic rate taxpayer and pay 20 per cent income tax, £125 before tax becomes £100. When you invest this money into your pension, you get back the income tax you originally paid, so your £100 contribution becomes £125.
If you’re a higher rate taxpayer, you’ll get even more tax relief, but you’ll need to claim it via your self-assessment tax return.
You can benefit from tax relief for your retirement up to the age of 75. Even if you’re approaching retirement age, you can still make a difference by opening a pension now.
Gary Smith, financial planning associate at wealth manager Evelyn Partners, says: “Where business owners are not making any pension contributions, I would certainly encourage them to do so as they could miss out on tax relief on personal contributions, and companies Tax on all contributions made through the company.
“Additionally, for those who own a limited liability company, employer contributions are often a very useful method of increasing retirement savings, especially if they only receive a nominal salary from the company ( say £12,000), which would limit the amount they can contribute personally. .’
Advantages: Pension savings as a self-employed person has various tax advantages
O’Connor adds: “I wonder if there is a mistaken belief that without employer contributions there is no point bothering with a pension and that you might as well opt for savings.
“This may come from misunderstanding the benefits of tax relief and the fact that you still get tax relief even if you are self-employed – and that is very valuable.” This is certainly more of an increase than interest on savings accounts.
“Thousands of PensionBee customers are self-employed, many of whom own their own businesses. Those who pay themselves from their salaries often also pay themselves employee pensions through their own company.
Are self-employed workers entitled to the state pension?
If you are self-employed, you are entitled to the state pension if you have paid national insurance for at least 10 years. You will need to have contributed for at least 35 years to receive the full amount.
If you are not eligible due to insufficient contributions, you can make voluntary payments to make up for lost years.
The State Pension is an important part of any retirement plan and the good news is that its amount has increased significantly due to the ‘triple lock’ – the policy of increasing compensation according to the highest salary, inflation or 2.5 percent.
Last year saw the highest wage figures, meaning the state pension is set to rise by 8.5 per cent in April.
Currently the maximum state pension is £203.85 per week (tax year 2023/24), which equates to £10,600.20 per year, but this might not cover all your living costs.
The Pensions and Lifetime Savings Association offers estimates of the type of lifestyle a single person or couple can expect in retirement, based on how much they are able to save.
How much should you save? This shows what various annual pension amounts will pay in retirement, on a single person basis (Source: PLSA)
However, these figures exclude housing costs, so you’ll need to think about putting some money aside if you’re renting or still paying off a mortgage.
The PLSA estimates that a couple would need £23,300 a year to live a moderate life and £37,300 a year to live a comfortable life.
This means that if you are self-employed and used to a certain lifestyle, you might consider opening a private pension to supplement the state pension.
How the self-employed can build up a pension
It’s never too late to start saving for your retirement and luckily there are plenty of low-cost pensions available.
You will need to do your own research to ensure you find a pension that suits you.
Some of the key questions you will need to ask yourself are:
- How much money do you have in your pension?
- What type of investments do you want to hold?
- Do you want to manage these investments yourself or entrust this task to someone else?
- Do you have existing pensions that you would like to consolidate?
- Will you contribute monthly or in lump sums?
If you already invest in an Isa, your platform will likely allow you to open a self-invested personal pension (Sipp), which will give you control over the investments that make up your pension pot.
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