The government inspired Work Place Pensions, or Auto Enrolment Pensions, as they are styled, have gone a long way to, at least, starting to sure up the shortfall in the future retirement income for millions of employees.
However, a recent survey found that potentially around 12 million private sector workers will be outside auto enrolment by mid-2018. (Association of Consultant Actuaries 1st Feb 2017)
The reason? The legislation does not encompass the army of self employed people who make up a large proportion of the workforce. In addition, those employees earning under £10,000 pa are not automatically enrolled into a pension scheme and therefore miss out on employer contributions into their pension pots.,
To address this latter point, the government may need to lower the threshold to include lower paid workers, since although many could, in fact, voluntarily join the pension scheme, human inertia, means that they often do not.
The Self Employed and their pension provision is another challenge.
Key Characteristics of the Self Employed
• Self Starters
• Self Motivated
• Self Disciplined
• They like being their own Boss
• They Like to run their own Timetable
• They are not afraid of Hard Work
• They Realise that if they don’t work, they won’t eat
However, being focussed on bringing in income, they are often too busy to consider some important questions:
• What if they are ill and can’t work?
• What happens when they want or need to retire?
There is solution to both of these scenarios, and accessing Independent Financial Advice would be a good starting point.
To address the issue of retirement for the self employed, this too has to be a voluntary choice unless the government steps in to introduce some sort of compulsion.
There are still great incentives to save into personal pensions:
1: Tax Relief
Whether paying tax or not, HMRC will still add 20p in the pound to pension contributions up to annual contribution limits. (Currently £3,600 pa or 100% of pension earnings, whichever is the higher)
For higher rate tax payers the tax relief is 40% (20% directly and 20% reclaimed via self assessment)
However, any tax relief is dependent on your own personal circumstances and is subject to change
2: Potential of Higher Returns
Money invested in personal pensions, relies on the stock market for growth and for many years, investment in stocks and shares has, over time, out-performed deposit based investments on a regular basis.
However, past performance is no guarantee of how funds will perform in the future and care must be taken to make sure that the investment is made, with advice, as to funds which match an individual’s personal attitude to investment risk and their own capacity for loss.
3: Future Flexible Benefits
The landscape of pensions ‘At Retirement’ has radically changed with flexibility being the key innovation.
Though ‘Annuities’, (the purchase of an income in exchange for a lump sum), are still popular and right for some, the flexibility offered by ‘Flexi-Access Drawdown’ is an option that offers a solution for those who want to access their pension funds in a tax efficient way and may be phase into retirement with some part time working and part pension income.
At this stage, Independent Financial Advice is crucial so that unnecessary tax charges are not incurred and any remaining invested funds are structured to your own personal risk profile.
Funds moved into a Flexi Access Drawdown product remain invested and as such still subject to market fluctuations.
The Self Employed class 2 National Insurance Contribution, does ensure entitlement to a State Pension, but this alone will probably not allow the self employed or employed to enjoy a full and carefree retirement, so taking the future into our own hands is imperative.
At Odyssey Wealth Management we have specialists who advice individuals and companies on retirement planning. The first meeting is always at our expense, so do contact us to arrange a convenient time for an initial discussion.
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