Flexible workers need flexible pensions

Self-employment: how do you build a nest-egg if the state won't help and there's no company funding?

It is no secret that the state has been doing less to provide for decent pensions for both those working and those already retired. The link between the basic state pension and average earnings was broken in the 1980s, and the value of the State Earnings-Related Pension (Serps), is being steadily eroded. But while employed individuals can, in many cases, look to their company for a pension top-up, the self-employed are neither eligible for Serps nor do they have the company safety net. All this makes personal planning even more important for people who work for themselves.

A time-honoured way for the self-employed to pay for retirement is to sell the business. If the business has assets, such as property or "goodwill", that others will pay for, this can work. A garage, shop or pub might sell as a going concern, but someone who sells their time, such as a computer programmer or management consultant, will find it harder to realise a lump sum.

A personal pension plan is a more reliable option. Flexibility, however, is vital. The self-employed in particular should be on the look-out for pension plans that allow holders to vary or stop payments without penalties and make additional payments without extra fees.

A conventional pension levies the bulk of its charges, including commission, in the first few years. This means that if a policyholder stops payments, or needs to surrender or transfer the plan, its value is lower than they might expect. An alternative, the "level-charge" plan, spreads the costs across the lifetime of the savings period. "With a level-charge plan you can stop and start the plan whenever you want to," explains Paul Gauntlet of Moores Marr Bradley, independent financial advisers. "There may be a minimum of pounds 30 a month, but beyond that you can vary the premiums. If you hit hard times, it allows you to reduce your premiums or stop altogether."

Pension companies are moving towards this form of plan. Two years ago, Scottish Widows repriced its pensions to reduce the upfront costs. "If, for some reason, you have to stop paying, the value of your plan will be broadly what you have invested," says Kevin Ward, marketing manager.

The personal pension market is becoming more competitive, and the self- employed can also pursue a number of radical options, including a self- invested personal pension (Sipp) that in effect owns the business premises. Alternatively, if you are more than a sole trader, you could set up a company scheme and negotiate a block discount.

One advantage of having the business premises as part of your pension fund is that growth in the value of the property is not liable for capital gains tax (CGT). But Lee Coates, of Ethical Investors Group, says there can be problems with this approach. "One drawback is that a lot of self- employed people rely on being able to sell the business as part of their retirement planning. If the premises are part of your pension fund, that might make it more difficult."

Most self-employed people will be more comfortable with off-the-shelf personal pensions. These score over other investments because of their favourable tax treatment. But this might change: the Government is rumoured to be considering reducing pension tax breaks, perhaps by restricting upfront tax relief to the standard rate of income tax or reducing the ability to reclaim tax paid on dividends. Changes could be announced on 2 July, when Gordon Brown presents his Budget.

Financial advisers suggest that pensions should be just a part of an individual's retirement planning. Mr Coates goes further. He believes that high charges make pensions an expensive way to save, especially for people who have either a low income, or an income that varies. He suggests tax-free PEPs as an initial, highly flexible way to save. As the business grows and an individual pays more tax, then is the time to look at a pension. Pensions are better value, in terms of charges, the more you pay in, and for higher-rate taxpayers the 40 per cent upfront tax relief is a significant boost.

Life and Style
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
ebookA unique anthology of reporting and analysis of a crucial period of history
Luis Suarez looks towards the crowd during the 2-1 victory over England
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform