ISAs can pay off for the self-employed, Britain's forgotten workforce
Sunday 21 October 2012
They are the backbone of our economy, but Britain's self-employed are swiftly becoming the forgotten workforce when it comes to pensions.
"Self-employed workers are very much left to their own devices as they won't benefit from a company pension scheme, contributions made by employers or access to financial advice which employers might also facilitate," says Patrick Connolly from independent financial adviser (IFA) Chase de Vere.
But this is a group that isn't doing it for themselves either. Almost half of self-employed workers in the UK have no form of private pension savings, new research from Prudential reveals.
Around 40 per cent of those with their own business believe they will never retire anyway, but experts warn assuming that you'll be able to work forever, or that the business will sell, is playing with fire.
Working beyond the standard retirement age is a good way to boost retirement savings because once you've hit 65 you'll benefit from both a higher tax threshold and no National Insurance obligations. The problem is that health and other circumstances often means retirement is a necessity, not a choice.
And, putting all your financial eggs in one basket is a huge risk, as it may be difficult to sell at the right time, if at all.
"The main issue is that a lot of self-employed businesses, especially of one or two-man bands, really have no sale value," says Chris Wicks of IFA Bridgewater Financial Services. "The business is the person and when they are gone, there is nothing really for a buyer to acquire."
The self-employed may not have access to workplace pensions but they can still invest in personal pension plans and self-invested personal pension plans (Sipps). Personal pensions are money-purchase arrangements – you contribute to the plan and that money is invested to build up a fund. Stakeholder pensions are a type of personal pension plan, with minimum contributions of just £20, a cap of 1.5 per cent on annual charges for 10 years, reduced to 1 per cent thereafter, as well as penalty-free transfers and flexible contributions.
Sipps offer greater freedom and control than conventional pensions and access a wide range of investments including commercial property, unit trusts, individual shares and commodities.
The amount you should be putting away each month will depend on your age, earnings and the lifestyle you are hoping to enjoy in retirement, but as a rough guide, experts advise saving up to 20 per cent of your earnings. If you started to put away £100 each month and increased these contributions by 5 per cent each year at age 25, by age 65 you would have a pension pot of £492,982 assuming net annual growth of 7 per cent. Delaying this to age 35 would reduce this to just £204,456.
For those keen to minimise the erosive effects of the taxman or who aren't keen to lock the money away until at least 55, making the most of an ISA allowance of up to £11,280 to invest each year, may work. ISAs do not benefit from tax relief on contributions as pensions do, but there is no income tax to pay on any growth and there is no need to buy an annuity at retirement. For the self-employed who often have less job security and need access to money during tougher times, flexibility is a big plus.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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