There are many benefits to running your own business – flexible hours, working from home, no fixed holiday allowance and no tiring daily commute.
However, while being your own boss is a dream for many, the lack of workplace pension and exclusion from auto-enrolment mean that many are in danger of not being financially prepared for the future.
According to recent ONS data, one in seven workers are now self-employed – accounting for around 4.5 million UK working adults. Of this group, only 18 per cent currently contribute to a pension, compared to 48 per cent of those in full time employment.
With this in mind, here is my go-to guide to securing your future finances if you are self-employed.
1) Solving the pension problem
New auto-enrolment rules introduced in 2012 mean that the majority of people working for a company will automatically be enrolled in a workplace pension by 2018.
With around 90 per cent of those enrolled in the system so far opting to remain in, it appears to be working. Many younger workers who perhaps wouldn’t have given any thought to a pension are now automatically enrolled and, if they want to opt out, they have to actively take a decision to do so.
However, there’s still one group that isn’t covered – the self-employed. With no obligation to set up a pension by law under the new scheme, and no employer to set-up a workplace pension on their behalf, many self-employed people are turning a blind eye to their financial future.
But it’s never too late to start! If you’re self-employed you can choose between a personal pension, a stakeholder pension or a self-invested personal pension (Sipp). The differences are the level of charges you have to pay, the flexibility about when and how much you can save, and the investment choices available to help grow your pot.
If you are recently self-employed and already have a work place pension from a former job, your best option may be to keep this in place and use this for top-ups. Many employers will allow you to keep contributing after you’ve left, so this will save you the hassle of setting up any additional schemes, although it’s still worth reviewing to make sure it still meets your needs in your changed circumstances
2) Don’t rely too heavily on the state
State pension reforms mean that even those with a complete National Insurance record can only expect to receive around £8,000 a year upon retirement. We suggest, as a guide, that customers are likely to need around two thirds of their pre-retirement income for a comfortable retirement – with that in mind the state pension may not get you as far as you’d like.
However, it’s never too late to start. Our Pension Calculator is a great way to work out how much you need to put away each month to keep your savings on track. Putting some time into making a plan will help in the future and may put your mind at rest in the present.
3) A N-ISA retirement
If, like many self-employed people, your earnings often vary from month to month it may be wise to keep your finances flexible where possible. ISAs can be a great long term savings option for the self-employed as many offer instant access, which is ideal if your earnings can be unpredictable.
New rules introduced for 2015/16 mean you can now make tax free savings of up to £15,240, which helps to maximise the way you save. You can choose from a stocks and shares ISA, a cash ISA, or a combination of the two up to your annual limit. A cash ISA can also be transferred to a stocks and shares ISA and vice versa.
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