Finance · 18 May 2018

Pensions: How the self-employed can navigate their financial future with more certainty

Of the 4.8 million self-employed Brits, 45% between the ages of 35 and 55 don’t have a private pension. In comparison, only 16% of employees are in the same situation.

Where employers are obliged to automatically enrol their staff onto a pension scheme, it’s up to the self-employed to start one themselves.

Choosing one can be tricky when you have an irregular income pattern, but there are unique benefits to be had.

Jamie Smith-Thompson, managing director of Portafina, explained: “I’ve been a sole trader and it can be tough. Well-meaning friends talking about how they wished they had the freedom of being their own boss and ignoring the huge uncertainty that can come with being self-employed. When’s the next job coming in? Will clients pay on time? Will I have enough to get by in the future?

“Pensions are extremely powerful and if yours is properly managed you can look to your financial future with much more certainty. And it could mean even more flexibility and freedom when it comes to the choices you have in life.

“It just doesn’t make sense to ignore or neglect your pension, especially if you are self-employed. And when it’s so easy to find out how your pension is doing and how to get it working as hard as it can for you.”

To help Brits decide whether to go the way of private pensions, Smith-Thompson highlighted some of the advantages, beginning with tax breaks.

Tax relief

There are alternatives to saving money, such as cash ISAs. But when you pay into your pension, the government will add 20-25% worth of extra income.

“This means that if you add £80 to your pension the government will top this up to £100,” Smith-Thompson explained. If you are a higher rate tax payer, you reclaim this relief from HMRC through a self-assessment form.

You’ll also have the autonomy to do what you want with your savings upon retirement. This includes taking out a lump sum of up to 25% of your savings without having to pay tax.

Compound interest

According to Smith-Thompson, compound interest will allow you to save even more. He said: “Put simply, when you save money it should earn interest. This interest can then earn more interest.

“The average investment growth (interest) you get in a pension tends to give your savings more opportunity to grow than other tools, such as a standard savings account or a cash ISA. This boosts the growth you can enjoy from compound interest.”

The earlier you start the process, the longer your contributions have the time to grow.

Where to invest in funds

Certain pension plans give you access to a professional investment manager, who will invest your money in various assets or stocks.

“It’s really important to understand that going up and down all the time is what stock markets do and history shows us that, as a whole, they have always tended to rise over the longer term,” Smith-Thompson maintained.

“The best thing to do is pay as little attention as possible to short-term news headlines and trust decades worth of reality.”

However, it also affords you control in choosing where to place your investment, where it be in property or land.

In a way, this is another way to expand the business.


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Shané Schutte is the deputy editor of Real Business, with a particular specialism in employment and business law, human resources, information technology and sales/marketing.