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?
Sunday 22 June 1997
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.
- 1 I was a Woman Against Feminism too
- 2 Fifty Shades of Grey movie trailer released: First look at Jamie Dornan as Christian Grey
- 3 Is Gideon Levy the most hated man in Israel or just the most heroic?
- 4 Students offered grants if they tweet pro-Israeli propaganda
- 5 The Tory donor whose firm is one of Britain’s biggest tax avoiders - with HMRC's blessing
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned
Peaches Geldof: Her final day – and her fatal decision
Students offered grants if they tweet pro-Israeli propaganda
Israel-Gaza conflict: Israel may have committed war crimes, says UN human rights chief
Taiwan plane crash: Typhoon Matmo could have caused TransAsia Airways disaster, airline suspects
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...
competitive: Progressive Recruitment: This really is a fantastic chance to joi...
£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...