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Self-Employed Pension: 9 Retirement Savings Hacks – Ad | This is a paid partnership with PensionBee.
We all dream of becoming our own bosses one day.
The idea that we can work our own hours and call the shots is very attractive.
Many of us are even doing so today with some living the laptop lifestyle running digital businesses from anywhere.
With the rise in technology use, more and more employees are demanding more flexible working arrangements.
This is partly a contributor to the rapid rise in the numbers of people who have become self-employed over the last decade.
Whether you’re a mother in need of flexibility to juggle the responsibilities of raising children…
Or you’re an aspiring entrepreneur at the early stages of a potentially successful business.
Further still, you might be one of the many educated 35 to 54-year-old self-employed people who make up 15% of the UK workforce.
It’s difficult to tell whether the rising numbers is by choice or by design.
The trend, however, is set to continue to rise.
Whilst the trend is positive, the ONS data on pensions (released in 2018) tells a different story.
Self-employed people are more likely to have wealth in their properties than they’re to in pensions.
When compared to employees, the data showed some interesting results for people aged 35 to 54:
- 45% of self-employed people had no pension wealth compared to 16% of employees.
- 25% of self-employed people had pension wealth of less than £25,000.
- In all categories, employees had more pension wealth than the self-employed.
Here are the stats:
The other interesting point from the ONS data is that more people aged 65 and above are becoming self-employed.
With all roads pointing to longer lives for most of us, it does make me wonder what the future holds for retirement.
Here are some of the stats for people aged 55 and above:
Again, the self-employed pension lags those of employees in all but the lower wealth categories.
Whilst writing this post, I took a 30mins break to offer some free coaching to a 65-year-old woman.
Her reality reflected exactly what we see in this picture as a self-employed person.
At the age of 65, she has little to no pension savings and now works a bunch of part-time jobs to make a living.
Although life is challenging, she “has her freedom from the 9 to 5”.
Surely there is a way to achieve being self-employed whilst also preparing for the inevitable future?
Table of Contents
Retirement Savings Hacks
I’m fully aware that saving for your retirement as a self-employed person is challenging.
You likely struggle to budget on irregular incomes and have a high need for flexibility.
With that in mind, here are some thoughts on how you can build retirement savings via self-employed pension:
1. Set Financial Goals
I’m stating the obvious here but every future achievement when it comes with money starts with setting goals.
I particularly like the process of goal setting because it helps us re-engage with the future.
If you do goal setting well enough, it helps you convert fluffy goals like “early retirement” into some hard numbers.
For example, I want to retire aged 55 in 20 years time with a retirement pot of £600k paying an income of £2,000 per month.
Without a goal this concrete, there is no way you’d have the motivation to save.
2. Use A Pension Calculator
A pension calculator is a brilliant way for you to work out your future retirement income based on your savings.
More importantly, it helps you work out the gap you need to fill in terms of savings to achieve your goals.
Simply follow this link to:
- Set your current age,
- Choose your desired future income at retirement,
- State your current pension pot size,
- Enter any ongoing monthly, employer and one-off contributions…
… to see where you’re projected to end up with your current level of retirement savings.
3. Find A Flexible Pension Provider
Given irregular income is a common issue associated with being self-employed, you’d want a provider that understands this.
Before seeking a pension provider though, ensure you have at least 3 – 6 months of expenses saved for emergencies.
This by itself is a tough ask as a lot of self-employed people spend their irregular incomes staying afloat.
For retirement savings, I’d suggest starting with a Stocks and Shares ISA. This gives you tax efficiency and easier access to your money.
Alternatively, you can open a Self-Invested Pension Plan (SIPP), which gives you tax efficiency and tax rebates. More on that below.
Check that your provider allows you to contribute into your pension whenever you want for any amount.
4. Make Consistent Pension Contributions
The key to achieving your future goals starts with making your retirement savings consistent.
Initially, this might be a challenge as you don’t have the comfort of an employer that indirectly forces you to save.
However, that discipline is necessary for you to adjust your lifestyle and spending, and build that savings buffer.
One way of doing this is to choose a number you can save to start with and set up a recurring standing order.
Then as you adjust your lifestyle and manage your finances with a budget, look to increase your savings rate.
Small savings across various areas of your life do add up over time, especially if the lifestyle adjustments are near permanent.
For example, every £100 per month that you reduce from your lifestyle expenses, you’d need £30,000 less for your retirement.
This is based on a rough calculation of the 4% rule i.e. assuming a future withdrawal rate of 4% at retirement.
£30,000 comes from £100 x 12 months x 25 years. The 25 years, comes from 100%/4%.
To read more on this, read How Much Money You Should Have Saved By Age.
I’d also recommend that you watch this video that illustrates how saving money on food can help your retirement:
5. Take Control and Consolidate Older Pensions
One of the best things you can do with your older pensions from previous employment is to consolidate them.
This has the advantage of:
- Helping you make sure that you don’t ignore any historic pensions.
- Making you keep an eye on fees.
- Helping you get closer to your money and to see how it is performing.
Consolidating your pensions can be a boring and long process. I personally hated doing it and could have done better things with my time.
This is why I love what PensionBee does. They essentially take away the pain and help you:
- Combine your multiple pensions
- Manage pension contributions, and
- Make withdrawals easy online.
The best part is, you get it all in one easily accessible place with access via a neat mobile app.
Follow this link to learn more about how it works and get started today.
I also previously reviewed them, so feel free to read that too.
6. Contribute Via A Limited Company
If you’re self-employed and also a director of a limited company, then you can make some important savings all round.
You can contribute into your pension via your company and this counts as an allowable expense.
By doing this, your taxable profits as a business gets reduced and you pay less Corporation Tax.
In addition, your company will not pay Employers National Insurance on these contributions too.
Win-win all round!
7. Enjoy Additional Tax Benefits of Pension Contributions
The beauty of contributing into a pension is that you get maximum tax relief.
I.e. the government gives you generous tax rebates as a way of encouraging you to contribute into a pension.
If you are a basic rate taxpayer:
You get a 25% tax top up each time you contribute into your pension.
So if you contribute £1,000 into your pension, you’ll get a top-up of £250 from HMRC after 4 – 6 weeks.
If you are a higher or additional rate taxpayer:
You get an additional 25% or more as tax relief, but you get this via a self-assessment tax return.
Note that you’re getting these rebates because a pension is a tax-efficient environment.
So you are being given back the tax you paid before you received your net income.
8. Explore State Pension Entitlements
A recent FT study found that a third of self-employed people interviewed said they’d rely on the State Pension for their retirement.
The current State Pension is around £8,767.20 for the 2018/19 year, and there is no guarantee what it would be in the future.
At the moment, you’d need to have National Insurance Contributions (NIC) for at least 10 years to qualify for a Basic State Pension.
However, in order to qualify for the Full State Pension, you'd need 35 years of NICs.
To see whether you are on track to receive the full amount, use the government’s State Pension Checker.
9. Start Today and Let Time Work For You
The beauty of starting to invest your money early is that money actually gets to work for you.
Most people forget that time really is the key asset. It’s something we lose the benefit of if we don’t use it.
I’ve previously written extensively about the benefits of compound interest.
Grab a copy of my compound interest calculator (from the above link) and see how your money can grow over time.
Money works harder than labour, so why not let your money do the heavy lifting in your life over time?
The key is not to assume that you have a lot of time ahead of you.
Be proactive and start today with however much money you have.
A lot of your future life is under your control, and every step forward you take today makes that future look better.
- READER CASE STUDIES: When Can I Retire?
- How To Invest In The Stock Market With Confidence: Beginners Guide
- READER CASE STUDIES: What Should I Do With My Savings?
- Why Saving Money Should Be Prioritised Over Investing
What are your biggest challenges to making retirement savings as someone self-employed?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.
Ken great article. Kudos to you for the resource provision and advice given therein.
For one who has pensions in different areas ie civil service and from a retailer (both old pensions) would it not be detrimental to being them together given that they are most likely to be under different providers, invested differently, interests being different and the general makeup of the pots being incompatible to bring them together without this making a loss?
Also, how does one know which side to pull the other to (ie which one should be merged into the other)?
Secondly, regarding self employed and pensions if one has a mortgage to pay off would it be apt to start with a company provided pension (if a director of course), whilst paying down that mortgage, beforehand looking at a SIPP or Stocks and Shares ISA later?
The Humble Penny says
Great questions. Thanks for reading.
My question to you is – Do you know what both pensions cost you every years? I.e. in annual ongoing fees (%). Bringing your pensions together usually has the benefit of economies of scale in terms of the annual ongoing fees. It also saves you having to keep up with the details of how 2 pension providers run.
If your employer or previous employer is investing for you via pre-defined choices (high vs medium vs low risk) you made, then all they’re doing is investing in funds (index or ETFs) that track an index. Worst still, they could have it in an expensive actively managed fund. Pooling it would help you look at things in a bit more detail.
A new provider will have similar funds options, which you can choose.
Also, when you consolidate your pensions, the direction of consolidation doesn’t matter. PensionBee (for example) would transfer both your exisiting pensions into a new pension that they’ll create for you. That new pension will have one fee (%) only applied to it. You’ll have the various options about which type of pension you want based on preferred risk and preferences.
I believe you’re asking if you should payoff a morgage vs investing in the stock market.
This depends on your personal circumstances- age, debt level etc.
Both are forms of investing but for different levels of return and risk.
Personally, I did both – Over payments on mortgage and investments in S&S ISA coupled with a SIPP later on. Note though that I had an Employer pension with matched contributions.
Below are links to Hargreaves Lansdown if you’re opening a Stocks and Shares ISA or a SIPP: