Self-Employed Retirement Planning

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

Self-Employed Retirement Planning

If you’re self-employed, investing for your retirement generally doesn’t come as easily as it does for those in employment. There are no employer contributions and your earnings can fluctuate from month to month. This means your thoughts tend to be with those more immediate financial requirements, however your long term needs are just as great. This makes it difficult to begin investing for your future, but not impossible, in fact it’s easier than you think and the earlier you start, the better.

Employed vs. Self-employed

Many of us dream of being our own boss so we can work when it suits us and take time off without seeking permission first. In fact, 15% of today’s workforce are self-employed which means that it is becoming an increasingly popular way of life. If this is you and you are making a success out of working for yourself, then congratulations! But have you thought about how you’ll cope come retirement if you haven’t put some cash aside every month?

Our ‘Tackling the Savings Gap’ research has found that the public feel they need an income of £23,000 in retirement to live comfortably, however our data shows that on average just £51 per month is invested into retirement funds.

Putting money aside for retirement, even when self-employed, can be easier than you think, especially with True Potential Investor. We realise that in today’s economy it can be difficult to find some spare cash to put away and not use until the future, but it is essential that we do. But how? One way is to think about what you spend your money on. Have you ever found yourself buying a pizza, a dress, a bottle of wine, etc. that you’ve simply bought on impulse? How often do you do this? Do you really need to spend that money or would you be better investing it? All that ‘extra’ cash can add up and if you save this rather than spend it, you’ll be thankful in the future.

Those of us who are employed are at an advantage as we are now automatically enrolled into a workplace pension. This is convenient as our employers make contributions too, topping up our overall pension pot. However, if you’re self-employed, it may still be a good idea to pay into a pension as you still benefit from tax relief on your contributions.

Why Choose a Pension?

If you have ever been employed, then you’ll receive a state pension for those qualifying years. However, even those who are employed throughout their working life will not receive a state pension high enough to see them through retirement. For this reason it is vital that you find a new way to fund your retirement years. One way of doing this is through a personal pension such as the TPI Pension. This is a form of private pension that you pay into. What you get back depends on how much is paid in and how well the investment does.

With a pension, you’re offered tax relief on up to 100% of your earnings by the government, or a £40,000 annual allowance, depending on which is lower. Any growth your pension pot makes is free of capital gains and income tax with the first 25% withdrawn at age 55, tax free.

The tax relief you receive depends on what rate taxpayer you are. If you’re a basic-rate payer, you’ll receive 20%, which means the taxman pays a further £25 for every £100 you pay in. If you’re a higher-rate taxpayer, you’ll receive 40% tax relief, resulting in an additional £66 for every £100 you pay in. And if you’re a top-rate tax payer (45%), you’ll receive a further £82 in tax relief.

Pensions became more flexible in 2015 as they can now be accessed once you turn 55. However, once you’ve withdrawn the initial 25% tax-free cash from your pension, the remaining cash will be subject to income tax as you draw either an income or a lump sum.

How Much Can I Contribute?

You can save as much as you like, but you must not go over the annual allowance of £40,000 or you will have to pay tax on this.

Why Choose an ISA?

ISAs are often a popular way to save for retirement by the self-employed. Unlike pensions, many are instant access which is ideal if your earnings fluctuate every month. As with pensions, ISAs are a tax free way of investing for your future, however with ISAs it is the withdrawal that is tax-free.

Since the autumn of 2015, ISAs have also been more flexible as it is now possible to repay any ISA funds you withdraw within the same tax year without it counting towards your ISA limit. This means that your investment has more chance of growth.

The number of ISA types is growing, but currently the two most popular are Cash ISAs and Stocks and Shares ISAs. Cash ISAs are worthwhile if you’re hoping to invest for fewer than five years, however, for long-term investments such as retirement, Stocks and Shares ISAs can see your investment give you a higher return. The best of these, such as the True Potential Investments ISA, offer diversified portfolios that will spread your investment across a number of dispersed geographical assets so that there is lower risk to your investment.

How Much Can I Contribute?

The current ISA annual allowance is £15,240. However, from April 2017 this will increase to £20,000. This is how much you can invest per year, from April 6th to April 5th the following year, and does not include any growth or interest you may receive.

What About the Lifetime ISA?

The Lifetime ISA is a new government initiative aimed at 18-40 year olds to help them save for a deposit for their first home and/or a pension. The appeal to this ISA is that for every £4 you invest, the government will top it up with a £1. That’s a 25% bonus that you will not find with any other product.

When the LISA was announced in April, it was immediately obvious that it would appeal predominantly to those of you who are self-employed and do not benefit from employer contributions. This is due to the additional financial incentive as well as its simplicity and access. However, it is important to be aware that you can only invest up to £4,000 a year into a LISA, so if you plan on investing more, then you will have to use another product also.

Let’s Hear From One of Our Self-employed Investors

We spoke to Gillian Keith, a regular investor with True Potential Investor, to discover how she plans for retirement.
What is your retirement goal?

I would like to remain living in my own home and not have to sell it to support my retirement. As I have close friends and family living around the world, I would like to have the means to travel to visit them, and also to continue the social, cultural and educational travel I enjoy at present.
How do you plan on reaching this goal?

My personal investment rules mean that I invest little and often, which usually allow me to meet my yearly investment goals. If I am able to continue in this way until my retirement (whatever that means for me) I should achieve a reasonable retirement income.
Which financial product/products do you use to help you reach your goal?

I try to contribute into an ISA (new or existing) every year, and I also contribute regularly to my pension fund, I also have similar accessible savings accounts which help me to invest for ongoing expenses like taxes, home repairs, and holidays.
Has your goal changed throughout your career?

Yes. As a self-employed artist, my income fluctuates greatly. When I have a good year, I tend to be optimistic with my goals, and when my earnings are down, I feel the need to adjust them accordingly. But as I age, I am more optimistic that my slow and steady approach to investing will get me to where I need to be.
Do you think you’ll reach your financial goal?

It would be foolish of me to try to predict the future. Unanswerable questions about my health, about the world economy, about politics and ecology might have a greater effect on one’s personal situation than one could imagine. But if I am fortunate to remain healthy enough to work steadily into my 60s and hopefully my 70s, I am confident that I will reach my financial goals. The key is to keep them realistic!

Both ISAs and Pensions are ideal ways of investing for your retirement. Which one you find more attractive depends on your personal situation, mainly whether you need access to your investments or are prepared to keep them untouched until you come to retire. Whichever you choose, you can be guaranteed that you will have a much more comfortable and stress-free retirement with these investments than without.

Open a Pension

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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