People working in the ‘gig economy’ or running a small business on their own often put off starting a pension due to pressures on their time and finances.
After a while, the task of getting started can seem daunting, so this week our pensions columnnist Steve Webb answers a reader question on this topic with a straightforward to-do list.
Getting started: People running a small business on their own often put off setting up a pension due to pressures on their time and finances (Stock image)
I was freelancing for a few years as a sole trader and have been running as a limited company for a year and a half now. I am really anxious to get something arranged about my pension as soon as possible.
I was put in touch with a financial adviser via my accountant, but he required a commitment of £250 a month/£10,000 a year.
Looking around at private pensions I am finding most places asking for similar levels of commitment, which as a limited company of one I find quite a lot to commit to.
I wish I was in the position of having a workplace pension with employer contributions, but please can you shed some light for those of us who don’t have this option and are eager to start saving for retirement.
I am 32, and currently have no pension pot apart from £1,000 from auto enrolment during a PAYE job about five years ago.
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Steve Webb replies: Now that you have got your business established this is a good time to think about your longer term future.
In this column I’ll run through some of the things to think about when setting up a pension if you don’t have an employer to choose one for you.
How to find the right Sipp for you
We wade through the Sipps on offer and pick the best for different investors. Read our guide here.
Just to touch on the issue of financial advice, it might be worth seeing if an adviser would see you for a fixed fee for a one-off consultation, rather than have an ongoing relationship.
An adviser might be able to help with your wider finances such as whether you have the best mortgage deal, whether you need insurance in case you were off sick and your business suffered, as well as advising how much you need to be saving in a pension and where to invest.
If you end up going it alone, you can set up a Self-Invested Personal Pension, otherwise known as a Sipp, on an online platform. See the box above.
Here’s what to think about when setting up a pension.
1) How much should you save?
The first thing is how much you need to put by. There is a rough rule of thumb in the pensions world which says that the percentage of your income you need to save for retirement is half of your age when you start saving.
In your case this would suggest a contribution rate of around 16 per cent which is probably more than you had in mind.
The good news is that you qualify for ‘tax relief’ on your contributions. If you are a standard rate taxpayer, the government gives you back the 20 per cent income tax you have paid on the money you pay into a pension.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
In simple terms, this means that if you want to end up with £100 in a pension, you only have to contribute £80 and HMRC will add back in the other £20.
The ‘add back’ is bigger if you are a higher rate taxpayer but you would have to remember to claim this via your annual tax return.
If a total contribution rate of 16 per cent – or 12.8 per cent net of tax relief – seems too high, it’s important not to give up!
Just getting started is the key thing, and you could perhaps put in place a plan to increase your contribution rate gradually once a year.
It is however important to understand that money in a pension cannot be accessed until you reach age 55, so you need to be sure that the money you are putting in your pension is not money that you might urgently need for your business.
2) Where should you invest?
Another thing you will want to think about is how your money is invested.
If you are thinking about retirement, then the chances are that your money will be invested for several decades.
On this basis most people would recommend that a good proportion of your pot is invested for growth in things like shares.
Although these can go up and down from year to year, over the long-term you would expect them to do better than putting your money in low-risk but more certain investments.
More sophisticated investors might want to choose how their money is invested themselves, but many pensions offer pre-prepared bundles of investments for your pension, which are geared around your age and attitude to risk.
3) What are the charges?
You will also want to look at how much a pension provider is charging you for running your pension.
Although the cheapest pension is not necessarily the best, a high charging pension plan will take a lot of money out of your pot and may well leave you less in retirement.
Under auto enrolment, charges on workplace ‘default’ pension funds were capped at 0.75 per cent.
4) How flexible is the pension plan?
As someone running a small business, you will want to check that the pension you have chosen is flexible.
If your business is likely to face ups and downs you may find that there are some times when you have less to contribute and other times when you can put more in.
How do Lifetime Isas work?
Lifetime Isas allow under-40s to save for a home and retirement at once, and the Government is offering free top-ups worth up to £32,000 if you max out your fund during your younger to middle-aged years.
You might want to avoid a pension where you have to commit to a rigid monthly payment schedule and where there are penalties if you miss payments or want to vary the amounts.
5) Consider a Lifetime Isa
I should mention that as someone aged under 40 you do have another option which is the ‘Lifetime Isa’.
This is a relatively new product which allows younger people to save money towards a house deposit or for retirement.
The main advantage is that there is a government top-up – similar to the top-up in a pension scheme for a basic rate taxpayer – and you don’t have to pay tax on the money you withdraw at the end.
The drawbacks are that you are limited to contributing £4,000 per year and you can’t access your money without penalty (aside from house purchase or terminal illness) until you are aged 60.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at [email protected].
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0300 123 1047.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.
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