Retirement Planning for the Self-Employed: Don’t be Left Behind!

Retirement planning
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Since the pandemic hit, the vast majority of small businesses across the UK experienced revenue losses. Approximately 9% of small businesses went under.  

For those that are now either picking up the pieces or getting back to healthy profit margins, it’s important to be planning for the future. Not only for the sake of having emergency funds set aside for business survival in tough economic times but for your retirement when you decide to walk away.  

The self-employed could be considered as being at a disadvantage for pensions, however, that is only because auto-enrolment only applies to employees. When you are in the driving seat of your own business, you have to manage your business finances and personal finances.  

Part of personal financial planning is casting aside some money for your pension.  

Trouble is, self-employed income is rarely a fixed salary. Some months are terrific, others can see income drop drastically. Putting aside a small percentage will rarely suffice. Besides, it is all too easy to plan to put money aside, then use it for something else.  

Top Tip: You do not need to treat your pension fund as a monthly subscription payment like auto-enrolment is for employees. Some people manage better by paying lump sums either quarterly or annually based on the business finances.  

The Big Divide in Pension Contributions 

Estimates by the FCA report 55% of self-employed are contributing to pension pots. For employees, 80% contribute to pension pots largely owing to the automatic enrolment requirement for employers to provide workplace pension schemes. What is not mandatory is for the boss of the company to enrol in a pension scheme. 

The difference is that being self-employed, you should have more to draw on in your retirement than only a pension pot. It only applies if you are savvy with the income drawn from the business during the higher earnings periods. 

To be a step ahead, you need to be using every incentive available. Especially when the cost of living is sharply rising, interest on savings decreasing, and credit rates are being hiked even faster.   

Retirement planning for the self-employed can be a package  

It’s called building an investment portfolio. A package you tailor to the type of retirement you want. Draw on assets from the business, put an exit plan in place if you plan to sell, have the pension pot, but in addition to maximising tax relief on Individual Savings Accounts (ISAs), or Self-Invested Personal Pensions (SIPPs), there are other investment schemes the government offer that can help diversify your investment portfolio tax-efficiently.  

Each type of pension pot has its limits for tax relief. For most people, the limit for pension funds is £40,000 per year. There is a carry-over that allows you to carry forward unused tax relief on pension investments over the previous three years.  

For businesses that have not met the threshold in previous years, (likely a lot in 2022) should you sell a business, or land a contract that leaves you with a taxable windfall, the carry forward of previous tax relief can reduce your tax liability while increasing your total pension pot.  

As the business grows, you do not need to contribute £40,000 to a single pension fund to maximise your tax relief. It can be diversified.  

A few tax relief schemes in the UK for retirement planning are Venture Capital schemes. These include the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts. These are more complex. These schemes are designed for businesses to invest in the economy.  

The funds are used to provide capital funding to small and growing businesses. The EIS is mainly investments in mature businesses generating profits, whereas the SEIS is riskier as the funds are invested as “seed” money for very early-stage start-ups. These are long-term investments and should not be entered into without financial advice. Returns are not guaranteed. The only guarantee is a tax break for the money invested. What you get back is guesswork.  

When maximising tax relief as part of your retirement planning to diversify your investment portfolio, it is wise to know what funds are available, the income that can be drawn and when and how much tax relief you can make use of. The more diversified your retirement portfolio, the healthier your retirement can be.  

The only requirement for the self-employed is to make sure to plan ahead. Sitting on the sidelines leaving it until later risks being left behind in later years. 

 

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