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Preparing for a comfortable retirement is one of the most popular savings goals among UK adults according to NerdWallet UK research. But for sole traders it’s not so easy.
High startup costs, irregular income and the cost of doing business can push a personal pension down the priority list for those choosing to work for themselves as an alternative to traditional employment.
Ian Black*, 44, from Newcastle, spent 13 years as a sole trader in the music industry. He started saving into a personal pension in his mid-thirties, after waiting years to make enough money to put some aside. “I definitely knew I wanted to do it at some point, it just wasn’t feasible financially in the early stages”, Black told NerdWallet UK. “To begin with you’re just trying to survive, cover your costs, keep the business going, make enough to live off,” he explained.
Black’s situation is not uncommon, particularly for those in the music business who’ve faced financial insecurity in recent years. Retirement savings options available to sole traders include Lifetime ISAs, personal pensions and self-invested personal pensions (SIPPs), but not enough people are using them. Only 16% of self-employed workers are paying into a pension, compared to 88% of those who are eligible for auto-enrollment into an employee scheme.
Jackie Spencer is head of money and pensions policy and strategy at the Money and Pensions Service (MaPS). She told NerdWallet UK that since the cost of living crisis, MaPS has seen “an increase in interest in pension savings” among the self-employed, with more solo business owners considering how saving for retirement fits into their overall financial plan.
Despite rumours that the state pension could run out in the next two decades, Spencer thinks it’s likely there will be “some element of the state pension throughout everyone’s working life”. But the pandemic and other economic disruptions have left many people craving more certainty. Self-employed people have traditionally relied on selling their business or some assets out of their business to fund their retirement, Jackie explained. “That’s an uncertain plan, whereas long-term savings in a pension vehicle is more certain”.
For solo business owners wanting a reliable income to cover their later life, these five tips could help you top up your personal pension pot and dial down savings-related stress.
1. Use free online tools and calculators
To get an idea of how much pension income you could receive when you stop working, plug your expected pension contribution into an online calculator, such as this one on the MoneyHelper website. The calculator can provide you with a forecast of your income from your personal pension, previous employee pension schemes and your State Pension. You can also use it to work out a target retirement income to aim for.
“If it falls short of expectations, then you can also model the impact of making bigger contributions. Boosting your contributions even by relatively small amounts can have a big difference,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, in an email to NerdWallet UK.
2. Start small, but start NOW
Not being able to save the “ideal” amount into a pension, due to cashflow pressures or a looming tax bill, can create a psychological barrier for some self-employed workers.
While starting to save as soon as you can is beneficial, even if the initial amounts are small, growing a pension pot can be hard to balance against current financial challenges. “People know what they need to do, but most people are out living their lives and trying to create their business,” said Spencer, adding; “do what you can rather than trying to wait for some perfect moment.”
Leaving employment to work for yourself means leaving behind regular pension contributions from your employer too. But any amount you can save – however small – will be boosted by a government top-up of 20%, something Black thinks many sole traders don’t realise. “A lot of people just think the money they put in is [all that] goes in the pension, but actually you’re getting an additional contribution from the government. That’s obviously worth thinking about because it’s like bonus money,” he said.
3. Be realistic
Making regular contributions to your personal pension is a good option if your cash flow allows. You can treat savings as an essential outgoing along with other bills, and set up a standing order that you don’t have to remember each month. However, the income peaks and troughs experienced by many sole traders can make it difficult to save the same amount each month. If you’ve only recently started your business, don’t be too hard on yourself if you have to skip a few payments at certain times of the year.
Once he had settled into self-employment and his business was more sustainable, Black started making a minimum contribution to his pension every month and adding additional top-ups when he had cash to spare. “If there was a month when I couldn’t afford to do it, I could just not pay in that month… I could move it up and move it down accordingly,” he said.
If this sounds like something that might work for you, check with your provider whether you’re able to make more ad-hoc contributions to your pension. “We get a lot of people choosing to make contributions to their SIPP towards the end of the tax year because they have clarity on what their earnings have been,” said Morrissey.
4. Keep an eye on your pots
To help keep your retirement goals on track, check your pension regularly, although there’s no need to become a slave to it. “Look at your statements when they come once a year, pick up the phone if you need some help getting interpretation on what that statement means,” suggested Spencer.
For self-employed workers feeling uncertain about their financial future, free and impartial pension guidance is available on the MoneyHelper website. You can also check your state pension on the government website.
5. Consider an ISA as well
It’s important to remember that any money you save into a personal pension cannot be withdrawn until you reach retirement age. To reduce the risk of tucking away money that might be needed sooner, Black started saving using an easy-access ISA which he could dip into for a financial emergency. “If you do suddenly need that money it’s not locked away like it is in a pension… you’re getting some of the benefits of saving money, but without the risks of being like locked away,” he explained.
Morrissey agreed, saying: “The ability to access the money early can make the Lifetime ISA attractive to groups such as the self-employed who may not be keen to tie their money up in a pension until the age of 55.”
*Name has been changed
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
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