Words, Tony Harris, Contractor Financials
Recent studies, including research from the Resolution Foundation, have shown a big decline in pension savings for the self-employed.
This could be put down to a number of factors including the stagnation in wage growth over recent times, plus the fact that income can fluctuate in this sector.
There’s also a psychological barrier here too, many often believe they are too young to start saving for retirement or simply don’t know how to go about it. And this is why pension savings can take a back seat.
Life expectancy by 2030 is predicted to be in the region of the late 80’s, meaning many of us could be funding for our post work lives for 30 years plus. Therefore the State Pension would barely cover life’s essentials. What is now clear is that we all need to focus on putting some money aside, especially as many of us are now bringing more debt into retirement, like outstanding mortgages.
Let's clear up a few of the myths surrounding pensions. They are a very tax efficient vehicle for saving! For the self-employed market, all contributions will receive 20% tax relief at source and then added to your basic rate tax band to offset against any higher rate liability (this receiving the additional 20% relief).
For the Ltd company set-ups, investment can be made tax free and in turn contributions can be offset against corporation tax. In most cases, pensions offer a more efficient savings route than ISA’s.
Since April, pensions have stepped into a new dawn of flexibility; from the age of 55 -based on current legislation - you're able to draw on funds in any way you choose. You can vary your level of on-going income without cap, or take a series of lump sums as and when required. There’s also the option to cash in the entire fund, but in most circumstances this wouldn’t be prudent.
Any remaining capital on death can now be left tax free to your dependants, or any nominee of your choosing. These beneficiaries can also leave a legacy fund to future successors, and again this also has the potential to be left tax free. Annuities are now adopting many of the new rules to offer a much more flexible product. So, gone are the days where pensions were considered poor value if you were to die early.
Saving for your latter years is one of the biggest steps you’ll ever take and one of the largest financial commitments you’ll make. In this ever growing contractor community the one overriding connection is that the buck stops with you when it comes to planning for your future. The need to build up a retirement buffer has never been so important.
Any questions about pensions? Ask away...