importance of managing finances

5 tips to help self-employed workers harness the power of their pensions



Posted on: 7th June 2018

Many people are attracted by the idea of self-employment. In fact, the idea is so alluring that figures show that between 2001 and 2017 the number of self-employed workers increased from 3.3 million to 4.8 million. The appeal of self-employment is undoubtedly strong: after all, who wouldn’t want to be their own boss and pursue their own dreams and passions on their ‘terms? Yet, for all the attraction of the self-employed lifestyle, there is a downside – and that’s the issue of pensions.

Why are pensions a problem for the self-employed? Well, the reason is too few self-employed workers have one, and those that do lack the confidence to make their pensions work better for them. Recent statistics show that almost half (45 per cent) of self-employed workers aged between 35 and 54 have no private pension provision at all, and the remainder lack confidence in their pensions.

Why is that particular issue so concerning? Well, it’s because self-employed workers without access to a private pension are missing out on future benefits. A pension is one of the most powerful savings’ tools available to workers: what’s more, pensions have many other advantages which other savings methods lack.

How can self-employed workers get more out of their pensions?

Pension advice specialists, Portafina, have come up with 5 key tips to help the self-employed harness the power of their pensions.

Compound Interest on your Pensions

If you understand what compound interest is, and appreciated how it works, then you will be able to benefit from it and gain an advantage over your peers. In simple terms, your money should earn interest while you save. This interest then compounds and earns more interest over time.

The average investment growth (compound interest) you receive from your pension will generally outpace other savings methods like cash savings or cash ISAs, and help your savings grow more quickly.

Tax Relief

One of the greatest appeals of a pension is the tax relief you will gain on savings. Tax relief immediately increases the value of your contributions. That benefit is then further increased year-on-year by compound interest.

For basic-rate taxpayers, the government will add 20 per cent to whatever pension contribution you make: so, if you were to add £80 to your pension, the government will top this figure up to £100. Higher-rate and additional rate taxpayers can also claim back the 20 per cent or 25 per cent they pay in income tax

Regain Control of your Pensions

One of the benefits of self-employment is that you have more choices and are better able to control circumstances your peers cannot. Saving into a pension can help to extend that control into later in life, by giving you more money and income options to choose from, rather than relying on your business or assets as though they were property.

Do not Rely Solely on your State Pension

Self-employment might mean that you do not qualify for a full state pension as the amount you pay for your National Insurance will differ from those who are in paid employment. However, if you harness the power of your pension and make full use of all of its advantages, you will not need to rely on the state pension in the future.

Have More Faith in the Stock Market

There is a good chance that a proportion of your pension will be invested in the stock market. That will understandably concern some pension savers, as headlines about the Stock Market are not always positive. However, whilst the value of stocks and shares may rise and fall, history has shown that overall the value of stocks and shares have always tended to rise over the longer term.

Chartered Financial Planner for Haven IFA, Graham Slater says:

“As a sole trader, I know it can be tough. Well-meaning friends have spoken about how they wished they had the freedom of being their own boss, all while ignoring the huge uncertainty that can come with being self-employed. When is the next job coming in? Will clients pay on time? Will I have enough to get by in the future?”

“Pensions are extremely powerful. If yours is properly managed, you can look to your financial future with much more certainty. This could mean even more flexibility and freedom when it comes to the choices you have in life.”

“It just doesn’t make sense to ignore or neglect your pension if you are self-employed, especially when it’s so easy to find out how your pension is doing and how to get it working as hard as it can for you.”

Talk to Haven IFA

If you are thinking about investing in a pension or would like to find out how your savings can work harder for your retirement, then it’s always advisable to have an independent financial advisor by your side. Contact Haven IFA today to see how we can help you save for retirement.