Why the self-employed should save their surplus income into a pension


I know many business owners who, until getting the information they needed, simply didn’t have a pension because they didn’t see the value in having one. I am on a personal mission to educate you on why pensions are a vital planning tool for you and your business.


Why are pensions mistrusted?

The reason pensions are mistrusted is because they are generally misunderstood.


What we see in the news is usually the bad news about pension funds. How pension funds have been lost, like when employers go bust and they take down their company pension scheme with them. Or miss-selling by financial advisers or scams to transfer your pension funds to unauthorized schemes. And most recently we have had a review into potential misadvise around transferring out of defined benefit schemes. All this negativity is bound to make you cautious. It’s inevitable you would worry that pensions simply aren’t a safe place for you to invest your hard-earned money.


A pension is a perfect way for you to extract your money from your business profit each year.


Saving into a pension should not be ignored, it should be part of your overall strategy for both your business and maintaining your future lifestyle once you stop working.


A pension is just another tax wrapper that shelters your money from unwanted tax and provides you with incentives to save over time, similar to an ISA (individual savings account) which is a tax wrapper that more people feel comfortable using.


Many business owners I speak to see their business as their retirement asset. Your business is a valuable asset and I would always recommend you speak to your accountant about any potential sale value for the future. But nobody knows what the future will bring and a business that works today may not be a business that can operate in 10 years’ time. The sale value is extremely uncertain. Extracting profits from your business over time is a very smart thing to do, your business can still be sold, but you have a second source of retirement income to back you up. Your pension is the perfect tool for extracting profit from your business over time.


Types of pension

There are different types of pensions. But for the self-employed you generally have 3 types of pension you can invest into:


1. A stakeholder pension

2. A personal pension

3. A self-invested personal pension (‘SIPP’)


Once your money is in a pension you can invest in cash, stocks & shares, or commercial property (just to name a few). A SIPP will give you much more control over what you can invest in however as the name suggests you are in charge of picking your investments. The message here is that you can have as much control as you want over the management of your money when it is inside your pension, from delegating to an expert to managing your money yourself through a SIPP.


Reasons to invest in a pension if you are self-employed.

- Pension contributions attract income tax relief. You can pay 100% of your UK Relevant Earnings into your pension and get tax relief at your highest marginal rate of tax. Tax relief is capped at £40,000 a year currently, but you may be eligible to carry forward any unused annual allowance from the last 3 tax years. So as a self-employed sole trader when you move money into your pension HMRC adds an extra 20% for basic rate tax relief, and if you have any higher or additional rate tax to pay you can claim this back when you do your tax return. So it doesn’t always make sense to just take save up income from your business and leave it sitting in cash, as a pension can make your profits work harder for you.

- If you are a limited company you also get to treat pension contributions as an eligible business expense and can offset this against your corporation tax bill!

- Once your money is in your pension your investments grow free of tax!

- You can currently access your pension funds from age 55, some schemes may have different rules so best to check.

- You can take up to 25% of the money built up in your pension as a tax-free lump sum.

- The remaining 75% can be taken as an income, which you’ll usually pay tax on at your marginal rate of tax. So you can manage the drawdown and taxation over time.

- The rules for accessing pensions have become much more flexible, depending on the scheme you are in, but generally, you can take all or some of it as cash, buy a product that gives give you a guaranteed income (sometimes known as an ‘annuity’) for life or continue to invest to get a regular, adjustable income (sometimes known as ‘flexi-access drawdown’).

- Your pension fund is usually outside of your estate for inheritance tax purposes. So it can be a useful inter-generational planning tool.


Do you want to rely on the state if you value your lifestyle in your retirement?

The current state pension maximum is £175.20 a week if you’re over 66 and have worked in the UK for 35 years and paid your National Insurance over that time.


The Government Actuary's Department (GAD) estimates that the UK's state pension fund could run dry by 2033!


By saving for your own retirement you are taking control of your own future financial independence, why wait until you may or may not receive a state pension. Your state pension is still there, but if you are smart it will be a bonus!


Take action

If you want to know more about pensions, then get in touch. As a chartered financial planner, I am a pension expert, having an advanced diploma in pension planning and pension income options. As a financial coach, I am determined to help more business owners use their business profit wisely and feel confident starting a pension.


It’s time to focus on your finance and find your freedom.


Arrange a discovery call with me, Emma Wright, Financial Coach who is also a highly qualified Chartered Financial Planner. Email me at hello@emmawrightcoaching.co.uk.


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