Category: Pensions

The picture-perfect view of being self-employed is understandably attractive: the notion of being your own boss and doing what you love under your own steam.

In fact, the number of self-employed workers in the UK has steadily risen from 3.3 million in 2001 to 4.8 million in 2017, according to latest figures.

However, recent statistics also show that most self-employed people have little confidence in their pensions and almost half (45%) of self-employed workers aged between 35 and 54 have no private pension at all.

The reality is that your pension is one of the most powerful saving tools available and has many advantages that other saving methods don’t. Therefore, those who are self-employed and not using a private pension could be missing out on a lot of benefits in later life.

To help the self-employed, a pension advice specialist has outlined five reasons why they should take advantage of the power of their pension.

1. Compound interest

Understanding what compound interest is and how it can benefit you will help you stay ahead of your peers when it comes to your savings. Put simply, when you save money it should earn interest. This interest can then earn more interest.

The average investment growth (interest) you get in a pension tends to give your savings more opportunity to grow than other tools, such as a standard savings account or a cash ISA. This boosts the growth you can enjoy from compound interest.

2. Tax relief

Tax relief is one of the greatest USPs of a pension as it immediately increases the value of your contributions, which is then multiplied year after year by compound interest.

For basic-rate taxpayers, when you contribute to your pension the government adds back the 20% that is usually deducted from your earnings. This means that if you add £80 to your pension the government will top this up to £100. Higher and additional rate taxpayers can also claim back the extra 20% or 25% they pay in income tax.

3. Take back control

Being self-employed means you’re in control of many things that your peers maybe aren’t. Saving into a pension can help extend that control to later in life, by giving you more money and income options to choose from than relying on your business or assets like property.

4. Don’t rely on your state pension

Self-employment might mean that you don’t qualify for a full state pension as you pay a different level of National Insurance to those who are employed.

Fully utilising a private pension and the power it gives you will mean you could be in a position where you can be sure that you won’t have to rely on the state pension in the future.

5. History shows us that stock markets work

There’s a good chance that a proportion of your pension is invested in the stock market. And when it comes to stock markets, news headlines are often full of sensationalist doom and gloom. This can understandably cause worry and fuel people’s distrust of pensions.

It’s really important to understand that going up and down all the time is what stock markets do and history shows us that, as a whole, they have always tended to rise over the longer term. The best thing to do is pay as little attention as possible to short-term news headlines and trust decades worth of reality.

I’ve been a sole trader and it can be tough. Well-meaning friends talking about how they wished they had the freedom of being their own boss and ignoring the huge uncertainty that can come with being self-employed. When’s the next job coming in? Will clients pay on time? Will I have enough to get by in the future?

Pensions are extremely powerful and if yours is properly managed you can look to your financial future with much more certainty. And it 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, especially if you are self-employed. And 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.”

A higher proportion of women are now in workplace pensions than men according to Office for National Statistics figures published today.

New data on workplace pension scheme membership drawn from the latest Annual Survey of Hours and Earnings for 2018 shows where workplace pensions saving is heading.

It shows that among full-time and part-time workers, a higher proportion of women than men, are now members of workplace pension schemes.

This is partly driven by the fact that pension membership rates are much higher in the public sector where women make up a larger proportion of the workforce.

But this does not mean that women are anywhere near achieving pension equality according Royal London director of policy Steve Webb.

He says: “While it is great news that far more women are now members of workplace pensions than in the past, there remains a pension gulf between men and women.

“Being a member of a pension is a great start, but the size of your pension will depend on how much you earn and how much you and your employer contribute.

“On both of these fronts, inequalities in the jobs market mean that women are still lagging far behind men when it comes to building up decent pensions.  On current trends, women’s pension equality could still be decades away.”

The statistics also show how auto-enrolment has boosted workplace saving as 76 per cent of UK employees were members of a workplace pension scheme in 2018, up from 73 per cent in 2017.

This is a 29 percentage points increase compared with 2012, when auto-enrolment was introduced.

Paying off debt has been cited as the main reason for taking tax-free cash from a pension, a survey has found.

Research has found that more than a third of those seeking advice on taking tax-free cash were doing so to tackle ongoing debt.

A further 21 per cent suggested the funds were for home improvement and 11 per cent needed it to pay for a new vehicle or to cover maintenance on their current car, van or motorbike.

The average age at which the advice firm’s customers took advice around tax-free cash in 2018 that 56 years and seven months, with more than half of those surveyed taking most of their money before they turned 56.

Before a tax-free cash transfer, average pot sizes were £89,974, while median pots were £56,923. The average tax-free amounts, therefore, were £18,110, or £12,171 for a median pot.

The a spokesman for the Company which carried out the research said: “There is obviously good financial sense for most people in leaving their pension pots invested in growing assets tax-free for as long as possible.

“However, it’s also clear from our dealings with pension freedoms clients that the majority who seek advice around taking some tax-free cash from age 55 have very good reasons for wanting to do so.

“Tackling a debt once and for all, especially one attracting a high interest rate, can also make good financial sense, as well as reducing anxiety and their monthly outgoings.

“Likewise, investing in their property, which is often their main asset as well as their home, to keep it fit for purpose as they head towards their retirement can avoid further deterioration and far larger bills down the road. These people aren’t being reckless, they are looking to their tax-free cash for sensible reasons.

“Anyone thinking of taking their tax-free cash just to put it into their bank or building society savings account should think carefully about what they are giving up, and what it could cost them in the long term.

“In many cases people simply don’t understand their pension whereas they are confident they understand their bank account.

“Much more needs to be done to engage people with their pensions and make them easier to understand – especially when more and more self-service is being encouraged with very few safeguards.”

HM Revenue & Customs’ most recent figures show a total of £21.7bn has been cashed in from pension pots since the freedoms were introduced in April 2015.

There has been a steady increase in the funds being withdrawn year on year with almost five million withdrawals having now been made using the pension freedoms.

There was a slight drop-off in the value of payments made in the past three months but this still amounted to just under £2bn accessed via 585,000 withdrawals – the highest number since records began.

So people are clearly making the most of the freedom and choice regime. But is such unrestricted access to pension funds a good thing? Some commentators say yes, for more than one reason.

Right decision

Firstly, pensions as a concept in this modern world of constant change need trust. Trust in the pensions system has been eroded over the years, rightly or wrongly. You gain trust by trusting others, in this case trusting people with their own money. The government took a bold step giving back control of pension funds to those who have saved their hard-earned money into them when it brought in the freedoms. We are still only a few years in but, while there have been some teething problems and some large sums of money have been withdrawn, it has so far not been the free-for-all that some predicted.

Secondly, the restrictions we faced before the freedoms were causing more issues for those who have built up multiple small pots throughout their careers.

Thirdly, being able to dip into the funds when it suits or getting access to larger sums early on in retirement has helped many who would have been stuck paying off debts while receiving just a small pension annually. The interest saving for a lot of people must have been significant.

Drawbacks

On the flipside of all this, though, the ability to access large sums of money in a single transaction has provided an additional, lucrative target for scammers.

When income was limited, and the norm was regular income for life, and scammers could not access pension funds. Now they can target individuals, coercing them to cash in their funds with the promise of better returns or more exciting investments, only to run off with them (and after they have been taxed as well).

As clients have the right to access these funds, providers may be unaware of what they intend to do with them.

But apart from education and warning, there is little else that providers can do.

There is no doubt about it, pension freedoms need to be embraced. And the government, providers and advisers need to do what they can to educate and protect the public from making mistakes.

Right now, this appears to be working, but only time will tell.