If you’ve set up your own small business, chances are you are self-employed. There are many advantages of being self-employed, but when it comes to a retirement income, the options narrow compared to a worker who is “automatically enrolled” in a workplace pension scheme.
What is auto enrolment?
The process of auto enrolment was introduced by law in 2012 to help more people save for their retirement. In the past, it was up to workers to decide whether they wanted to join their employer’s pension scheme or not.
Auto enrolment means all employers must offer a workplace pension scheme and automatically enrol eligible workers in it.
According to the Pensions Regulator, as of September 2017, the total number of employers who have completed the auto enrolment declaration of compliance is 807,810.
This requirement has applied to larger employers since October 2012 and will apply to all employers by 2018.
But at the moment, it doesn’t include those who are self-employed.
Tom McPhail, head of policy at Hargreaves Lansdown, says: “Auto enrolment has been an incredible success, helping over eight million people so far to start building up savings for their retirement.
“However, millions more have been left behind… the self-employed and people working past retirement age all risk missing out on the generous top-ups available. The sooner the benefits of this fantastic system can be extended to help more of the population, the better.”
Nathan Long, senior pensions analyst at Hargreaves Lansdown, adds: “Ultimately the best way to help the self-employed would be to extend auto enrolment to include them too.
“Using the tax system, contributions could be required at the same time as paying the tax bill and passed directly to a pension provider.”
What are your retirement income options?
The number of self-employed workers has hugely increased over the past decade, especially after the global financial crisis of 2008.
There is also evidence (according to a recent report from wealth manager Old Mutual) that the nature of self-employment is changing over time, with some jobs which historically have been undertaken by employees now becoming self-employed.
The figure for self-employed workers in the UK now stands at approximately 4.8 million. The largest group, baby boomers, has spent between seven to 11 years in self-employment. During 2016, the number of self-employed increased by 83,000.There are many options out there to create a retirement income, you can even start saving, from as little as £5 a week.
Set up your own pension
If you want a simple pension, you can join NEST, the UK government-backed scheme set up to help employers with their auto enrolment duties.
If you want something low cost that gives you more control, consider investing in a SIPP – a self-invested personal pension.
Most SIPPs allow you to select from a range of assets, such as unit trusts, investment trusts, government securities, insurance company funds, traded endowment policies, some national savings and investment products, deposit accounts with banks and building societies, commercial property and individual stocks and shares quotes on a recognised UK or overseas stock exchange.
SIPPs can be bought via an online investment platform. If you are not an experienced investor in maybe advisable to consult an independent financial adviser.
Sell your business (near retirement age)
If you’ve accrued enough capital in your business, you can sell this and use the proceeds to fund your retirement. However, a word of caution. Often, self-employed workers feel their business is their pension – this is a high-risk strategy that puts all of your eggs in one basket. It could backfire if your business doesn’t perform well, or if nobody wants to take it over when you retire.
Buy an investment property
If you have access to a lump sum, you can use it to buy an investment property and live off the rental income. However, this option may depend on whether you meet the strict lending/mortgage criteria.
Inherit a lump sum
You may be subject to an unexpected windfall from a member of your family, which could be used as part of your retirement income.
Stocks and shares ISA
If you want to save for the long-term, these products offer a great alternative. While there is no tax uplift, anything saved plus any growth can be taken out with no further tax to pay.
Put aside cash in alternative products for long-term saving. One example is the Lifetime ISA. However, Nathan Long at Hargreaves Lansdown is cautious about Lifetime ISAs.
He says: “Some have heralded the Lifetime ISA as the ‘saviour’ of retirement saving for the self-employed, reasoning that erratic cash flows bring about a fear of locking their money away until later life.
“Our own experience is that four out of 10 self-employed pension investors save monthly, meaning concerns about regularly committing money to retirement are perhaps overhyped.
“The Lifetime ISA has a huge flaw for self-employed retirement saving – the rules don’t allow people to set one up after age 40, yet a significant chunk of the self-employed are older than this.”
5 ways to prepare for retirement
If these options for generating a retirement income seem overwhelming, then Kate Smith, head of pensions at Aegon UK, has come up with five ways a self-employed worker can financially prepare for retirement:
- Start saving early and get into the habit of saving regularly.
- Maximise your savings by saving in a pension, the most tax-efficient way of saving for your retirement.
- Automate savings by setting up a direct debit to transfer regular savings into your pension scheme.
- Make up any gaps in your National Insurance record to make sure you get the full state pension.
- Create and write down a long-term financial plan for yourself that includes a ‘plan B’.
Have you got a pension or do you have alternative plans in place to deal with your retirement? Share your stories in the comments below.