Auto-enrolment seems to be working. According to figures recently released by the Office for National Statistics (ONS), the proportion of employees contributing to a company pension in 2017 reached 73 per cent, up from less than 47 per cent in 2012. This means that the introduction of auto enrolment has led to 9.5 million more people saving into a workplace pension since 2012.
This is good news for the Government and for employees, but what about the many millions of self-employed workers in the UK or those employed as the single employee in their own company? Currently, there is no obligatory arrangement for these individuals, which means that there is still a potentially huge ‘pension gap’.
Whilst many business owners wish to concentrate on establishing and growing their business, ignoring the need to start building a diverse portfolio of personal wealth from an early age could significantly limit options in later life.
Throughout their working life, business owners enjoy flexibility that employees do not. However, the greater structure imposed on employees in terms of saving for retirement often leaves them in a better financial position with greater options when it comes to ‘hanging up the briefcase’. Saving for retirement from an early age (ideally from your 20s) can allow a significant pension pot to accumulate by the time retirement age is reached.
For those with little knowledge, opening a pension can be a daunting prospect. So where should you begin?
How much to save
If you have not commenced meaningful pension contributions until your 30s or 40s, you may feel as though you need to play catch up. There is a rough guide that the percentage of your salary/earnings that you pay into a pension annually should be roughly half your age at the time you commence contributions. So if you’re 32 by the time you start your pension, this theory says you should aim to designate 16% of your earnings to your pension. This may appear excessive, but rather than being put off, have a serious think about what you can afford to set aside each month. The alternative to this would be to make lump sum contributions either once or twice a year, once you know how healthy your bank account is looking and what your liabilities (planned outgoings, tax payments etc.) are likely to be.
What type of pension
There are many different types of personal pension that you can contribute to. When choosing which type of pension is suitable, it is important to consider the features of the product and the investment flexibility it offers. Choosing the right type of pension is of particular importance when you reach retirement age as not all pension products provide the flexible access offered under pension freedom legislation.
Faced with all these options, it’s perhaps not surprising that business owners often prefer not to think about pension planning!
Method of funding
Those who are a self-employed (sole traders and partners) will fund their pension using their personal savings or income/ profits deriving from the business. Income tax relief is provided on contributions made in this manner.
Those who are directors of a limited company, however, have the alternative option of paying into the pension directly from the company. Corporation tax relief is available on contributions made in this manner. For directors of limited companies, this can be a simple and effective way of tax efficiently extracting cash from a company.
There are a number of DIY investment platforms available and it is possible to set up a pension by yourself. However, if you’re not familiar with pension products and financial markets, constructing a portfolio of investments with a strategy suited to your objectives and risk profile may be impractical.
Those who are self-employed or directors of their own Company should ask themselves whether the time required to research and manage investments is worthwhile. In many instances, a quality financial planner will have greater expertise and resources to manage wealth in an appropriate and considered manner.
Contact Gresham Wealth Management
For more information or to speak to one of our financial advisers about setting up a pension, please contact us.