The former Government Pensions Minister, Steve Webb, didn’t mince his words. In a report he published last April, he stated that selfemployed workers are heading for old-age poverty in their droves. A month later, the Federation of Small Businesses published figures showing that only 31% of self-employed people are paying into a pension, and that 15% don’t have any retirement savings of any kind.
If you are one of the 4.7 million UK people who run your own business, the focus that comes with it could understandably mean you haven’t started to adequately consider your own financial future. It might be tempting also to prioritise ploughing all of your savings into growing your business. But when it comes to deciding when you want to retire, you could be storing up some big problems.
Without an employer helping you to set up and contribute into a pension, you may be lacking provisions to fund retirement.
The value of pensions
There are significant tax advantages available from saving up via a pension as opposed to, for example, a regular deposit-savings account. If you’re still years away from retiring, it might be time to address any lack of pension provisions by arranging one now.
Although most self-employed people have the disadvantage of no employer making additional contributions into their pension, you can still benefit from income tax relief.
If, for example, you are a basic rate taxpayer who is charged 20% tax on your earnings, your pension provider will claim this back. What this means is that, for every £80 you pay into your pension, you end up with £100 in your pension pot. Higher rate and additional rate taxpayers could benefit even further.
These pensions do not include the same security of capital which is afforded with a bank or building society savings account.
The role of state pension
The basic state pension is a weekly income that everyone starts receiving when they reach a certain age – although the amount you are entitled to will depend on your National Insurance contributions.
It currently pays a maximum of £155.65 per week, which works out at less than £9,000 a year. The state pension will certainly help support you in retirement, but on its own this level of income might not be enough.
The future of your business
Many self-employed people will consider the business they own to be their retirement nest egg – but this still needs careful planning.
You may, for example, be looking to sell your business or pass it down the family. Others retire but remain the owner – or at least one of the owners – of the business. The potential advantages of doing so include receiving regular company dividend payments, which you can use as an income.
What you do with your business is a huge decision – both for you and your family. The sooner you start to consider its long-term future, the more time you will have to implement suitable plans towards a smooth transition.
Ask for help
Being self-employed is no picnic. Many people miss out on regular employee benefits such as sick or holiday pay; others find themselves working extremely long hours or getting by on an inconsistent level of income.
Dealing with these pressures for many years, a happy and contented retirement should be your reward for your blood, sweat and tears. By speaking to a financial adviser about your future, you can start to assess if you are set to have the provisions you need for a happy retirement – and if there is more you could be doing.