Pensions and Self Employment

Should a pension be treated as an investment

That's exactly what it is

Are there, in effect, alternatives to a private pension?

Yes, but none (well, few) are as tax efficient

How would you decide how much to pay in each month?

Rule of thumb is halve your age at the point you start the pension, and put that %age of your income into your pension. Obviously, if you start late, that's a scary number...

Id suggest starting with using one of these calculators to see what you might get at reitrement based on expected lifestyle and ability to save into a private pension scheme between now and then.

https://www.standardlife.co.uk/pensions/tools/pension-calculator

Rule of thumb is halve your age at the point you start the pension, and put that %age of your income into your pension. Obviously, if you start late, that’s a scary number…

Holy ... yes it is

Id suggest starting with using one of these calculators to see what you might get at reitrement based on expected lifestyle and ability to save into a private pension scheme between now and then.

How would you estimate the monthly amount you would look to need in retirement?

Or it is simply look to put as much in to the pension as possible (relative the money you need access to now and cash flow now)?

I guess that connects to the first quoted reply above and that % earnings is a minimum to aim for? eek!

How old are you?

How would you estimate the monthly amount you would look to need in retirement?

Another rule of thumb - two thirds of your current income.

Or, look at your current outgoings and add up those that you'll still have when you retire.

Or, many of the calculators will do an approximation for you.

However you do it, unfortunately you're unlikely to like the answer, but that makes the need to act even more important. The best time to start a pension is when you start working (and this really needs to be explained better to young'uns), the second best time is now.

How old are you?

35

Other fun fact is I am the only one in the household with income owing to a son with significant disabilities. So the future planning needs to prop up the entire family. Now there's a thought.

How would you estimate the monthly amount you would look to need in retirement?

Easy - work out what you spend now if you're renting then excluding work costs that's what you'll be spending the day you retire.  If you're an owner and the mortgage will be paid off, exclude work costs & mortgage payments.

Assumes no kids or the kids have already left home.

this really needs to be explained better to young’uns

Completely agree!

I am embarrassed to admit I didn't realise that state pension retirement age and state pension amount wasn't the end of the story. I thought that retirement age was fixed and maybe some people just got lucky by making a ton of money and that what "retiring early" meant. It is incredibly stupid in hindsight but no-one explains these things.

It is even more pressing since a great percentage of the population seem to be being pushed in to self employment and I really believe that the self employed (certainly sole traders) are at a massive financial disadvantage compare to other forms of employment in financial terms. More squeeze on cash makes less immediate problems like pensions go down the priority list

Easy – work out what you spend now if you’re renting then excluding work costs that’s what you’ll be spending the day you retire. If you’re an owner and the mortgage will be paid off, exclude work costs & mortgage payments.

Assumes no kids or the kids have already left home.

See below 🙁 It is hard to estimate costs of a son who will either never leave home or require significant care in assisted living

Other fun fact is I am the only one in the household with income owing to a son with significant disabilities. So the future planning needs to prop up the entire family. Now there’s a thought.

So the next question is, who do you go to to start a pension? Direct to a bigger provider or discuss with an idependant advisor? What is the next step for me?

35?  plenty of time to get one set up, but do it now!

I agree with DanW . The self employed are at a significant disadvantage to salary slaves.

I know they think we put everything through the books or love being payed cash, but it is tempting to swap that for pension contributions, sick pay, paid holidays and being able to spend all day online...

Tempting? nearly....

At 35 years old, you've definitely not left it too late.

One thing to bear in mind is that for those of us who are ~ 50 and younger, retirement is very unlikely to look how it does currently, not least because there aren't going to be enough people to do the work if we all retire.

this really needs to be explained better to young’uns

IME it's not just young folk, as highlighted by mid-30's Dan

See below 🙁 It is hard to estimate costs of a son who will either never leave home or require significant care in assisted living

Then you've already answered your question, future costs are probably no different to current costs.

If your OH is his Carer is she able to be registered to maintain her NI record - same as when in receipt of Child Benefit and not work?

Depends how risk averse you are and your financial situation. As a self employed sole trader you need to cover everything, sickness, holidays, pension, other unforeseen issues, etc. That means you can't really lock all your savings up in a pension, even if it is less tax efficient. Personally I like to split my 'spare' money into three pots: Readily available cash for work stuff and cash flow, medium accessible to cover sickness and unforeseen, and long term for pension. They get filled in that order so once there is enough in pot 1, some goes into pot 2. Once there is enough in pot 2 then pot 3 gets topped up. Having the pot 2 available to spend if needed I think reduces the need for payment protection insurance. You can effectively self insure, and if nothing happens then that money is available to do as you wish. As you get older the balance will likely change and some of pot 2 can get drip fed into the pension fund. You still get the tax benefit, just not the compound interest benefit. Your situation is different to mine as the wife works and I have no other mouths to feed so I can understand more caution and the desire for insurance but its worth doing a spreadsheet and looking at the numbers.

So the next question is, who do you go to to start a pension?

Someone who offers a fund that tracks the market with low risk and a low cost. Vanguard offer pension funds direct or you can buy through one of the financial companies like Hargreaves Lansdown

35 is nowhere near too late. Remember though that it’s still a gamble. Like any investment, it could all disappear and it’ll be locked in until a specific date, which if government policy changes could be pushed further into the future. On the up side, you get your income tax rate added back on to your contributions. I’ve also been self employed all my working days and hovered around the upper tax range. I used my pension for the years I went over to make the best use of this. Currently anyway, you don’t have to buy an annuity at the end. Once you reach a certain point it’s possible to make tax free withdrawals. Problem is though, realistically you are 30 years away from this point and the rules could all change by then. If possible speak to a number of providers and ask for recommendations. 

One thing to bear in mind is that for those of us who are ~ 50 and younger, retirement is very unlikely to look how it does currently, not least because there aren’t going to be enough people to do the work if we all retire.

This is another issue and something which always gets said but something I've never got my head around. When things like this get banded around my brain says "why would I give up close to 20% of my income now if I will never realistically retire" (right or wrong)

This is another issue and something which always gets said but something I’ve never got my head around. When things like this get banded around my brain says “why would I give up close to 20% of my income now if I will never realistically retire” (right or wrong)

That's why, for me, the pot 2 I mentioned of accessible money is important as well as a pension. It's a less tax efficient saving but its yours to do with as you wish, whenever you want. It could cover you if work dries up or you get injured, but if nothing bad happens you can use it to possibly retire early until your pension kicks in. You are still giving up 20% of your income but its also still there, available to you.

I used my pension for the years I went over to make the best use of this.

@clubby do you mean that any money you earned over the basic rate of income tax (£50,270) you would put in a pension to make sure you only pay basic rate income tax?

I guess this makes sense for things like keeping child benefit eligibility (under £50,000 earnings) but making your income appear lower has the disadvantage for things like terms when applying for mortgages. Being self employed is a real juggling act that most people never have to think about!

@nickjb the 3 pots is a good way to think about priorities for self employed but my worry is you still potentially end up with so little in a pension pot you kind of think "why did I bother". Maybe not when older and anything extra is a bonus. That balance of needs before retirement and after is tough.

I guess this makes sense for things like keeping child benefit eligibility (under £50,000 earnings) but making your income appear lower has the disadvantage for things like terms when applying for mortgages

Doesn’t work like that.  Pension company adds the extra 20% and  I was effectively given extra 20% tax relief on any part of my pension contribution from the higher rate band. I’m probably explaining it wrong though, my accountant deals with my tax returns and makes sure it all goes in the right boxes. From a benefits and mortgage/ credit point of view, gross income would still show as the same.

All that only applies if you don’t need that extra money now though.

The only advantage a personal pension gives (versus any other method of saving) is tax relief on contributions. If you're a standard rate taxpayer, that's a chunk of extra money but not an overwhelming one. If you're a higher rate taxpayer, it's definitely a big bonus.

If you could have 10k put into a pension, or an additional 10k on your house deposit meaning you buy a house worth 100k more (assuming 10% deposit), that 100k of house would probably have gone up by a lot more than the pension fund.

Yes, please to act on it straight away, not after Christmas, not when you’ve got a bit more, NOW.

I’m 46 and a sole trader for the last 25 years and I was also late to the party and making up for it now as I chose (possibly unwisely) to pay down the mortgage 1st.   I had a small pension from my first job until I went sole trader, but am currently sticking 25% of everything I earn into a Vanguard fund trying to make up for some lost time.   I’m hopefully not totally hosed though as having paid the mortgage off now leaves more cash every month to save, 25% to pension, 25% to pay the bills and the rest in east access high interest, premium bonds/ISA.<br /><br />

Don’t feel too bad though as you’re young enough to make a good difference and there’s lots worse off than you.  I agree pension planing should be discussed more for younger contractors.   My plasterer is 58 this year, hasn’t saved anything and is mortgaged until 67.  Scary.  Another contractor I know is 57, owes £275k on an interest only mortgage on a £300k house and also has no savings/investments. Even more scary!

For a rule of thumb on amounts of money to put away then consider that most good workplace pensions put about 15% of gross (pre tax) into your pension (note this is usually less worth than final salary schemes and is split between employee and employer contributions).
I'd start by working out if you can afford to put that sort of sum away and then get advice as to whether it should all go into a pension which is more locked down or whether some goes into ISAs or other investments in case the metaphorical roof blows off or other big crisis that might need cash.

That balance of needs before retirement and after is tough.

100%. There isn't a one size fits solution either. TBH I didn't bother with pension stuff at your age. Was much happier saving a bit and spending most of what I had. No big regrets... yet. I've been putting more effort in now and moving some of my buffer money into the pension as that age draws nearer. It's not a massive pot but I think it'll be enough, I'm not planning on buying a yacht.

The only advantage a personal pension gives (versus any other method of saving) is tax relief on contributions. If you’re a standard rate taxpayer, that’s a chunk of extra money but not an overwhelming one.

That's my feeling. If you have a generous company scheme its a no brainer. If you are self employed and may need that money sooner than 30 years time then an ISA can be a better option, for at least some of your money, with not that much lower a return

If you’re a standard rate taxpayer, that’s a chunk of extra money but not an overwhelming one.

Eh? It's 20%, that's hardly an underwhelming amount.

I think your pot is likely to need to be larger than most people's if its supporting 3 of you

first step I would do is see if your partner can get national insurance "years" whilst looking after your son. I don't know how the system works for your scenario, but I would hope there's a way she can be entitled to the full allocation even if she's not working due to being a full time carer. If you achieve that, your retirement income as a household is £20k.

How would you estimate the monthly amount you would look to need in retirement?

A few have answered how much to put in, and what you'll need so no point repeating it all but some other points.

1/ for most people their retirement is in three phases - Go-Go when you can do all the things you wanted to do but didn't have time - holidays, motorbikes....whatever. Go-slow; when you've done it all and/or aren't as energetic or fit as you were. No-Go; when excitement is a new episode of Murder She Wrote and the furthest you go is to the local shop to buy some Werthers. Your needs in those three phases won't be the same, and if you divide up by three and then can't use the last bit (or lose it all to care costs anyway) because you scrimped in P1 or P2 you'll feel cheated.

2/ Your specific circumstances make it harder. Personal question but will your son outlive you and so you need to provide for that, or do you need to make his life as full as possible while you can - in which case prioritise what's important

And lastly - as others have said, do it now. Find a good IFA by recommendation who will listen to your needs and help you plan against them, not generic advice (although see last comment coming). Even if the half your age is scary, don't use it as an excuse to put off until you can afford it. If you can only put a bit in now, and then ramp it up as circumstances change, still way better given you have 30+ years of compounding interest to go than doing nothing now.

(last comment - as well as an IFA, have a look at Martin Lewis guides, that way when you go to an IFA you aren't paying for their time to explain the basics to you, you can get started right away on your needs)

Good luck, on this and on life for you and family in general.

Does anyone know how to find information about past employer pension contributions?

My wife will have paid in when working in the NHS and I will have paid a small amount when employed. Neither of us have any clue about what or where we paid. We contacted the employers and they said they didn't know either.

I am embarrassed to admit I didn’t realise that state pension retirement age and state pension amount wasn’t the end of the story. I thought that retirement age was fixed and maybe some people just got lucky by making a ton of money and that what “retiring early” meant. It is incredibly stupid in hindsight but no-one explains these things.

If its any reassurance I've employed lots of people and its usually about your age that they suddenly start to take their pension seriously.  Many of them have turned down pension offerings for years to maximise cash in pocket.  Then they are maybe 1/3rd of their working life towards an early retirement and start to think about stuff.

It is even more pressing since a great percentage of the population seem to be being pushed in to self employment and I really believe that the self employed (certainly sole traders) are at a massive financial disadvantage compare to other forms of employment in financial terms.

I'm not convinced that's true - many people who are self employed or who run very small microbusinesses manipulate things to their own benefit in ways that PAYE employees "working for the man" never could.   Do you have an accountant?  Do you trust him for business advice?  Do you treat being self employed as running a business or just doing a job?  If its a business, could you wrap it in a Ltd Co (or other structure) that you could grow and build to sell on when you want to retire?   But I do know plenty of self employed people who aren't very good at managing the business side - and are still charging the same rate as when they started etc. We employ contractors from time to time and their contract rate is at least 2x the rate employees get even before doing any sneaky tax stuff, if you aren't getting that - you are being exploited - consider going employed, unless of course there's bits of being self employed that outweigh the money. If your customers would tolerate a 10% cost increase beyond what you already charge and you don't need that money - you could put that in the pension, HMRC will give you 20-40% more depending on your income.  OK thats not the 17.5% that some convenient rules of thumb say (but they are flawed anyway).

More squeeze on cash makes less immediate problems like pensions go down the priority list

The only real advantage I think employees have in this regard is that often the employee's money is taken off them for the pension before they even see it.

Does this help with the NHS one:

https://faq.nhsbsa.nhs.uk/knowledgebase/article/KA-04465/en-us#:~:text=If%20yo u've%20previously%20worked,us%20in%20locating%20any%20membership.

If you have previous employer pension it could be:

- a traditional employers pensions scheme operated by the company / trustees.   More likely with a bluechip company thats been around for a very long time.  All you'd need to do there is write to them with your new address.

- a group pension scheme.  That would be with one of the big finance houses like Aviva, Scottish Widows, Aegon, Prudential etc.  First step would be to remember who it was - you will have received paperwork (and if you haven't moved house will get an annual statement) .  Essentially they are just personal pensions but with some admin simplification through the company doing a bit of the work.  I think there is a way to track them down if you can't remember who it was - you could ask other people you worked with to recall the name.  Beware of people offering to find them for a "fee"...

- no pension / something you had to opt in to get and because it would have cost you money you might have elected not to take.  Before the gov made pension provision compulsory often you didn't get pension in first year etc.

If you’d like any pointers on using a SIPP platform please send me a message. I sacked my IFA and moved my pension to Interactive Investor about a year ago. It has been growing way better since I chose the funds myself, and has outperformed Vanguard Target Retirement Funds (the other low cost option I considered) by about 3 times.
Nothing complicated just finding funds with consistent performance over a period of years.

We employ contractors from time to time and their contract rate is at least 2x the rate employees get

If they are on long contracts and basically operating like employees then that is a good rate, especially if they then set up as an Ltd co and pay themselves dividends or some other tax dodge. That does need clamping down on and gives the rest of us a bad name. If they are genuinely self employed than that sounds about right. You need to allow for pension, sickness, injury, training, equipment, insurance, unpaid elements of running a business, time not working, etc. It all adds up and ending up with 50% in your pocket is not unusual.

Another contractor I know is 57, owes £275k on an interest only mortgage on a £300k house and also has no savings/investments. Even more scary!

That is beyond scary.

OT, but I would say that you may be paying 2x hourly rate Poly, but the end salary is probably comparable when you take in all the things nickjb mentions. The unpaid hours can be significant when you are your own accountant, IT, HR, logistics, marketing, etc, etc) and it does annoy me when people think all self employed people are making a killing for doing the same job and "doing sneaky tax stuff" as you put it 🙂

In my case I've made a niche in my area of Engineering that isn't really an existing job, basically acting as consultant using my knowledge and skills. That isn't a great business model but it does allow for flexibility around family needs and does allow me to do the work I love. That is the trade off vs other ways I could be financially better off but probably more miserable.

employee’s money is taken off them for the pension before they even see it.

One of the many advantages. When you are employed, you pretty much have everything taken care for you and your finances are far simpler. If you don't have enough money you try to find a better paying job or negotiate a raise and the percentages of outgoings and future planning stay quite constant. If you want more money it is pretty much a case of find a higher salary.

When you are self employed you often don't have the luxury of upping rates or just switching to a different group of clients who will pay more. There isn't the easy option of "just higher salary". It is usually work more and find more hours to charge for. I do agree that there are probably a lot of business basics people miss out on, but being self employed (in the sole trader sense) means having to be an expert in so many areas. As I said, I'm aware what I do is a bad business model but the life benefits have me in that position 🙂 I'm just trying to make it all work as best I can

Thanks @theotherjonv

2/ Your specific circumstances make it harder. Personal question but will your son outlive you and so you need to provide for that, or do you need to make his life as full as possible while you can – in which case prioritise what’s important

That is a really hard question and a really good one. The answer is unknown. He has a condition only identified about 30 years ago so the oldest people with the condition are only around 30.

I spend all my time planning for things that never happen so the lack of pension is out of character for me. But the point of enjoying now and not feeling cheated by the tottering to the shop for some Werthers stage of retirement also resonates as I'm already feeling a lot of opportunities have passed me by (that is also a big part of caring for someone with significant disabilities- realising life and things you can do as a family are changed significantly).

And lastly – as others have said, do it now. Find a good IFA by recommendation who will listen to your needs and help you plan against them, not generic advice (although see last comment coming). Even if the half your age is scary, don’t use it as an excuse to put off until you can afford it. If you can only put a bit in now, and then ramp it up as circumstances change, still way better given you have 30+ years of compounding interest to go than doing nothing now.

Regardless of the specifics and the fluffing around on my part, getting started is the key thing.

The reason for posting here is I am quite confident of better advice than most IFA, or at least a better spread of opinions and experiences. Thanks to everyone for the thoughts and help as I feel in a better position to actually get stuck in to this now

I am a similar ‘niche self-employed’ person. I run myself as a company (with one part-time member of staff) and use the People’s Pension as our pension provider. I pay monthly wages and then the pension contribution is calculated by the pension platform. This ensures that the 20% tax advantage of pensions contributions works out. If you start now even with a small % it is there building up. If there are dividends at the end of the year I then work out what to spend them on (at least this worked until I moved to France, now it’s a bit more of a headache).

You can check your national insurance record here: 

https://www.gov.uk/check-national-insurance-record

This will tell you how many years of contributions you have paid - you need 35 for the full state pension which you can only draw down once you get to 67 (or whatever they change it to).

You can check your national insurance record here:
> https://www.gov.uk/check-national-insurance-record < This will tell you how many years of contributions you have paid – you need 35 for the full state pension which you can only draw down once you get to 67 (or whatever they change it to).

I did this a while ago before realising a state pension wasn't the full story, but thanks.

If anyone is as much of a pension numpty as me then I urge you to follow this link 🙂 It is very easy to miss years of state pension contributions (no income until ~23 y/o owing to studying for me for example).

first step I would do is see if your partner can get national insurance “years” whilst looking after your son. I don’t know how the system works for your scenario, but I would hope there’s a way she can be entitled to the full allocation even if she’s not working due to being a full time carer. If you achieve that, your retirement income as a household is £20k.

Thankfully the government websites have improved massively in recent years so I was able to find this out. Being in receipt of child benefit or being registered as a carer (in receipt of carer's allowance) are two routes to full state pension entitlement for the affected years.

Navigating the system is the tricky bit because if you ever thought "why bother for registering for child benefit- we don't need benefits" then you miss out on knock on provisions like state pension cover if not working.

The only thing I'm not sure about is if paying back child benefit payments when earning over the threshold removes the entitlement to state pension. This isn't a frequent worry but would be good to know for peace of mind.

If either your or your partner’s ‘adjusted net income’ is over £50,000 a year, you may have to pay the High Income Child Benefit Charge.

Your adjusted net income is your total taxable income before any personal allowances and less things like Gift Aid. Your total taxable income includes interest from savings and dividends.

If you have to pay the charge, you can still get the other advantages of Child Benefit like National Insurance credits.

Answered my own question with the excellent.gov pages.
https://www.gov.uk/government/organisations/hm-revenue-customs/contact/child-benefit

So takeaway is apply for child benefit as a self employed person even if you end up having to pay it all back. As a family this allows me to earn whatever I earn and my wife maintains full state pension entitlement until the child is 12, even if she does not earn and contribute towards her state pension.

If they are on long contracts and basically operating like employees then that <em style="box-sizing: border-box; --tw-translate-x: 0; --tw-translate-y: 0; --tw-rotate: 0; --tw-skew-x: 0; --tw-skew-y: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-ring-offset-width: 0px; --tw-ring-offset-color: #fff; --tw-ring-color: rgb(59 130 246 / 0.5); --tw-ring-offset-shadow: 0 0 #0000; --tw-ring-shadow: 0 0 #0000; --tw-shadow: 0 0 #0000; --tw-shadow-colored: 0 0 #0000; color: #000000; font-family: Roboto, 'Helvetica Neue', Arial, 'Noto Sans', sans-serif, -apple-system, BlinkMacSystemFont, 'Segoe UI', 'Apple Color Emoji', 'Segoe UI Emoji', 'Segoe UI Symbol', 'Noto Color Emoji'; background-color: #eeeeee;">is a good rate, especially if they then set up as an Ltd co and pay themselves dividends or some other tax dodge. That does need clamping down on and gives the rest of us a bad name.

Do you include 'Cycle to Work' in PAYE tax dodges?

The old-time simplistic rule of thumb was a daily rate (ex VAT) of 1% of an equivalent PAYE salary - so if the standard salary is £50k then the contactor rate is £500+VAT per day.

Still remember though that PAYE other benefits, including knowing that on-the-whole you'll get paid next month.