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The Cost of Going Self-Employed – Your Pension Pot

Nov 10, 2019 | Finance and Insurance, Money

The Cost of Going Self-Employed – Your Pension Pot
The Cost of Going Self-Employed – Your Pension Pot

Recent research by Nest, one of the leading financial providers in the UK, shows that nearly 50% of all who are self-employed don’t know how to save for their retirement years. The issue? If you’re self-employed, then you may not have a pension program set up via auto-enrollment.

Auto-Enrollment Pensions & Workplace Contributions

Employees working with a company are automatically enrolled into pension plans, which also include contributions from their employers, which are also combined with their own contributions. As a result, workers are generally prepared when it comes time to retire.

However, there’s a wide gap between retirement savings for employees working a regular job compared to those who are self-employed.

According to Kate Smith, head of pensions at financial provider Aegon, “The self-employed represent a big gap in an otherwise improving pensions landscape.” She goes on to say that the auto-enrollment program has helped get people actively saving for retirement, who may not have otherwise done so.

High Numbers of Self-Employed Not Prepared for Retirement

About 2/3 of British self-employed have never saved towards their retirement. This is a dangerous situation, as they face running out of money when they’re older and may choose not to work or are unable to work in their pensioner years.

One issue is the highly variable nature of earnings for people who are self-employed. Work income may vary from month-to-month, depending on if they have work on not. Plus, income varies by the money earned for their work on each job. These ups and downs in finances can make it difficult to save.

However, people need to be encouraged to find ways to save. In fact, financial experts recommend self-employed workers put about 5% or more of their income into some type of savings scheme, in preparation for their retirement years.

The Cost of Going Self-Employed – Your Pension Pots

How to Start Saving for Retirement if You’re Self-Employed

The first place to start is by taking stock of what you’ve already put into savings. If you have no savings put aside yet, then start now. Take a look at your personal finances and then develop a plan to begin building a savings initiative, which will become your financial safety net.

Experts recommend setting aside about 3 to 6 months of savings to cover any financial emergencies you may have now. These funds can cover your car breaking down, your home needing a new boiler, etc. Once you have these funds set aside, then it will be time to begin saving for retirement.

You can choose from three options, which involve different ways to invest your money:

  • Personal pension plan provided by financial providers such as Nest and Aegon
  • Stakeholder pensions, which are capped at 1.5%; you can stop and start these without penalty
  • SIPP (self-invested personal pension) is another option, which allows you to invest in a wide range of investments; however, these generally have higher fees

Things to Keep in Mind

When you’re ready to shop for the best retirement savings scheme, be sure to know your financial situation. As a self-employed person, you understand how your income may vary from month-to-month, so remember to realistically estimate your monthly/yearly income. Understand your budget—where is money going each month and how much is going out? Then you’ll be able to figure out how much you can save each month, trying to aim for 5% or more paid into the plan each month.

Don’t forget to compare fees and charges before settling on a retirement plan. You’ll want to get the best deal possible, with the aim of putting as much money away as possible. Look for providers that offer great products, but with fees and charges you can afford. Keep in mind that many of these investment savings plans do require that your funds are not accessible until you’re 55 years of age.

Being self-employed and saving for retirement can be challenging. However, if you develop a plan, you’ll soon be on your way to ensuring your retirement will be comfortable and you won’t have to be as concerned about finances in your golden years if you start saving now.


Useful Links For Self Employed Pension Advice:

Money Advice Service: Pensions for the self employed: https://www.moneyadviceservice.org.uk/en/articles/pensions-for-the-self-employed

Pension Advisory Service: Self employed Pensions: https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/self-employed-and-pensions

Money Advice Service: Pension Calculator: https://www.moneyadviceservice.org.uk/en/tools/pension-calculator



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