Tax & admin · 28 September 2018

Are you at risk of pensions poverty? Know your options

Nearly five million people in the UK are self-employed, but how many of them are financially prepared for later life?
Nearly five million people in the UK are self-employed, but how many of them are financially prepared for later life?

The pensions crisis threatens to leave many self-employed people facing pensioner poverty later in life. Know your options to stay ahead.

Pensions aren’t sexy. If anything, pensions products are generally dismissed as being too complicated and cumbersome, which could hit the self-employed the hardest, according to a new report from IPSE. Here’s how you can stay informed and prepared for later life.

Pensions products sound more complicated than they are

The number of self-employed workers in the UK has steadily risen from 3.3 million in 2001 to 4.8 million in 2017. But only 31% pay into a pension, according to the Association of Independent Professionals and the Self-Employed (IPSE). A new report from the group reveals that this is because pension products seem inaccessible and convoluted. Adding to the problem, the government recently withdrew its involvement in the pensions dashboard. This was despite the fact that 51% of the self-employed trust government websites as a source of guidance.

“There is a crisis hanging over the sector and we must take action to avert it,” Jonathan Lima-Matthews, IPSE’s senior policy adviser says. “Our landmark report found one of the key reasons for low saving rates among the self-employed is the pensions industry’s PR problem.”

“Despite their best intentions, the pensions industry has a lot to do to bring the 3.3 million self-employed people not saving into a pension back into the fold, and a good starting point is improving communications.”

“Self-employed people often feel bewildered by pensions options that are inaccessible and loaded with jargon. This can often put them off engaging with pensions altogether,” he adds.

Is it worth getting a pension?

The reality is that your pension is one of the most saving tools available and has many advantages that other saving methods don’t. Those who are self-employed and not using a private pension could be missing out on a lot of benefits in later life.

While some of your living costs may reduce when you retire, you’ll still need a significant amount of money to live on. Government research suggests you’ll need between 50-70% of your pre-retirement salary when you finish work. The current amount of State Pension available to retirees is just over £8,000 a year, which is less than half the value of the minimum wage.

View from a sole trader

“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,” says Jamie Smith-Thompson, managing director of Portafina. “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.”

Here are five pensions-related facts to help you decide if it’s right for you.

1. Compound interest

Understanding what compound interest is and how it can benefit you will help you stay ahead of your peers when it comes to your savings. 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.

2. Tax Relief

Tax relief is one of the greatest USPs of a pension as it immediately increases the value of your contributions, which is then multiplied year after year by compound interest.

Unlike cash ISAs, pensions are made for later life, which includes many tax benefits.

The pensions tax relief is equal to the highest rate of income tax you pay. This means that if you’re a basic rate taxpayer, you will only need to contribute £80 to end up with £100 in your pension.

If you put that £80 into an ISA, however, it will be worth £80. In a way, tax relief is cash back you wouldn’t get from other savings products.

For basic-rate taxpayers, when you contribute to your pension the government adds back the 20% that is usually deducted from your earnings. This means that if you add £80 to your pension the government will top this up to £100.

Higher and additional rate taxpayers can also claim back the extra 20% or 25% they pay in income tax.

An annual allowance limits how much you can contribute into your pension each year while still receiving tax relief. This allowance is based on your earnings and is currently capped at £40,000.

3. Take back control

Being self-employed means you’re in control of many things that your peers maybe aren’t. Saving into a pension can help extend that control to later in life, by giving you more money and income options to choose from than relying on your business or assets like property.

4. Don’t rely on your State Pension

Self-employment might mean that you don’t qualify for a full State Pension as you pay a different level of National Insurance to those who are employed. Fully utilising a private pension and the power it gives you will mean you could be in a position where you can be sure that you won’t have to rely on the State Pension in the future.

5. History shows us that stock markets work

There’s a good chance that a proportion of your pension is invested in the stock market. And when it comes to stock markets, news headlines are often full of sensationalist doom and gloom. This can understandably cause worry and fuel people’s distrust of pensions.

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

A wish list for pension providers

According to IPSE, self-employed workers need more support from pensions providers, starting with transparency and easy to understand products. Here is a wish list from the trade body.

  1. Pension products should be more user-friendly and engaging. The terms of a policy must be clearly and accessibly set out with understandable and engaging language.
  2. Deliver the pensions dashboard. Access to real-time, transparent information on an individual’s pension pot/pots will allow them to work out how well prepared they are for later life and, where necessary, make improvements. For people who are disengaged, having access to this information could encourage them to start planning properly for their retirement.
  3. Pension providers should develop smartphone apps. This would provide a user-friendly, easy-to-access platform to help savers understand the value of their current pot and its projected worth in the future.

What’s your financial plan for later life? Do you contribute to a pension? Get in touch to share your story with us. 

Sign up to our newsletter to get the latest from Business Advice.


 

ABOUT THE EXPERT

Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.

Franchising