Pensions for the Self-Employed

Planning for Retirement: Everything you need to know

Welcome to the first and hopefully not the last mortgages money and my podcast. Today, we’re going to talk about retirement planning.

Who is Jason Murgatroyd?

I’ve been in the industry for quite a few years now, over 30 years, working with a combination of insurance companies, banks, building societies. And over that period of time, I’ve been specialising in insurance investments, pension planning and mortgage broking. I’m lucky enough to continue to service those people, which is fantastic. I mean, over those 30 years, I’ve seen some massive, massive changes in the industry.

We’ve had recessions. We’ve had stock market crashes with housing crashes, dot com crash, global financial crises, Brexit and dare I mention it, coronavirus. But we’ve still come out of the other end of all these things that have gone on. Very often, you know, things like these create a lot of opportunities. My advice is, take some advise from someone like me who has been through these situations.

Who is Shamraze Ahmed?

I’ve been part of the CS Financial Group since 2018. I qualified as an adviser over seven years ago. I always get asked why I joined the industry as an adviser. I think it stems from the vast amount of time I spent my father’s convenient store as a child. Seeing different people daily and being able to converse with them was something I thoroughly enjoyed most and handling money. The thought of combining them both was the reason I pursued the path to become an adviser.

I have a holistic approach with all my clients, which I feel is imperative given how quickly things change around us. Over the years, I’ve seen the financial services industry change for the better, and especially now it’s an exciting time to be part of it.

Let’s get back to the basics and talk pensions.

I don’t think anyone has ever woken up and thought, you know what, I need to sort my pension out today. It is generally on most people’s To-Do list, but often that job that you never seem to get around to. It’s not the most exciting thing in the world, is it? So let’s get back to basics.

Explain the different pension schemes that are available?

Just to mention a few of the different types of pensions that you can consider:

  • State pension
  • Personal pension
  • Stakeholder pension
  • Group personal pension
  • SIPS
  • Occupational pension
  • DB schemes
  • DC schemes
  • ABC schemes

Can you imagine somebody who doesn’t know much about pensions looking at that list, you know it’s enough to put anybody off.

State Pension

First of all, these pensions are available for everybody. You qualify for your pension throughout your working life. So you’ve got to be working. You’ve got to pay national insurance contributions. That’s what qualifies you for the state pension. Now, it’s been running as a state pension for many, many years, going back to 1948 and its gone by many names.

The state pension is going to entitle you to a pension you can live off for the rest of your life, basically. But it’s not a great deal of money. The state pension is going to pay today in the region about £175 a week.So it’s less than £10,000 a year. It works out round about £750 a month, which I don’t know about your aspirations for retirement, but that’s certainly not going to fulfil many people’s aspirations in retirement. I wouldn’t have thought.

The state pension is that it’s totally reliant upon what workers are paying into the system. This creates an imbalance when we’ve got an awful lot more retirees now than we have workers, so this is where the funding of the state pension is really feeling the pinch at the moment. This means the government is going to have to keep reviewing the state retirement age. It’s already risen to 67. It’s going to be rising to 68 by 2028.

Workplace Pensions

So if you’re employed?  Employers now have to make sure they offer a pension scheme to employees. This was all part of auto enrolment, which came in around about 2012. So the employees must also pay into the scheme. So this is fantastic. This has made the availability of pensions for employees much greater than it ever was before.

So we’ve seen a lot more active pension contributors now than we used to ever see before. So the employers need to pay into these schemes, you need to pay into them. Let’s think about the limits that are going to be paid into these pensions. There are guidelines that employers need to stick to. Employers need to pay three percent of your salary, you as the employee are going to contribute four percent and then the tax relief, which again on top is equivalent to one percent. So you’ve got eight percent of your earnings going into a pension scheme.

We generally use the benchmark of 10 percent, that everybody should try and strive to pay at least 10 percent of their income into a pension scheme.

Workplace pension schemes will take various forms.

A DB scheme stands for defined benefit. You join the scheme with your employer and it’s based on your earnings over the time that you work with the employer and the number of years that you work for that employer pension fund, then your pension that you receive at the end of it will be based on a combination of your earnings and the number of years that you’ve been paying into that scheme.

With that type of scheme. All the risk of that scheme is with the provider. It’s with the employer. They have to make sure that regardless of what your salary is in those final years of working, they’ve got to pay a percentage of that for the rest of your life.

The alternative is DC schemes,  which stands for defined contributions. Now defined contribution schemes have become far more common than defined benefit schemes because the risk is taken away from the employer. So this is based on contributions that you put into the pension, plus your employer’s contributions, plus your tax relief. What you get back at the end of it is purely based on the investment returns. So it’s what that money does over that investment period. And you end up with a pot of money with which then you’ve got options as to how you draw that money down.

Personal Pension

Imagine also there are people who aren’t employed by an employer. So for example, self-employed. Those who are self-employed people have contract based pension schemes available to them, and one that most people will have probably heard of is the personal pension.

It works almost identically to a DC (defined contribution) scheme in that you make payments into the pension. You get your tax relief. What you don’t get if you’re self-employed is an employer contribution paid into it. That fund will grow over time. Then at the end of it when you plan to retire you have the investment returns and a pot of money to draw out as a pension. There are all sorts of versions of each of these.

What really is the big benefit of putting money into a pension? Well, the biggest thing really is the tax efficiency side of things. So you’ll get tax relief on your contributions going in. You’ll get tax free growth on the money in the fund. Then you’ve got tax free lump sums at the end of it when you come to draw it. So tax efficiency is the biggest benefit.

There is obviously a lot more to talk about each of those schemes. But the idea today was just give everyone an overview.

So I need to sort my pension. What’s the first thing that I should do?

Good question. Probably the one question that sits in the back of everyone’s mind when thinking about retirement. The key to setting up a pension is to start by seeking advice. The first step is to make an appointment with a financial adviser. Let someone who knows the ins and outs of pensions advise and guide you. I mean, you wouldn’t attempt to change your boiler unless you were qualified. Then why would you run the risk with your retirement in terms of the process once you arrange to speak to a financial adviser?

They will then discuss and agree with you your financial objectives and aspirations. These goals can range from living a conservative lifestyle and having a steady income at retirement to being able to travel the world. I mean, everyone has a different picture of their retirement. So there are no limits. This in turn allows you and the adviser to design a budget for your retirement. As advisers we would then collect further details about you and analyze what existing provisions you have, whether these preserve pensions, property or savings, just cash in a bank account, you will be surprised how many people will already have preserved pensions with previous employers and they were unaware they had even paid into them.

I mean, we’ve all seen our pay slips and sometimes you have deductions which potentially you might not have questioned or understood. What a financial adviser does for you is to establish other factors which will assist them design the strategy for you to meet your financial goals.

At this point, your adviser will work their magic. They will design a solution which will be personalised to your needs and objectives and more importantly, within your budget. Now, at the last stage, your advisor will present to you your solution and implement this, in this case, setting up your pension. This will be done for you. You can sit back and relax. Your advisor will then revisit your pension with you regularly to see if anything has changed in terms of circumstances or potentially even if your objectives for retirement have changed.

Maybe you don’t want to travel the world anymore. You were just happy to travel in the UK, especially now, especially now. If things change, don’t worry. This is the benefit of using a qualified adviser. They will be able to assist you design a solution to cater for any changes. So I think that pretty much sums up how you can go about setting up a pension.

I’ve already got a pension – How can you help me?

You must review it! Sit down with an adviser and plan your retirement.

We have a lot of clients who have got past employers pension schemes that they’ve left behind. So they’ve changed employer, they’ve moved on. It becomes a case of sitting down to see what’s happened with those pension funds, see what they’re doing, see what they’re likely to continue to do, and also review and check on the client’s aspirations for retirement.

That is the key to this review. Are these pensions going to be on track to do what you expect them to do in the future? And if not, have we got time enough to do something about it or not? The case may be as far as existing pensions are concerned, you need to keep tabs on what they’re doing. It’s very easy to lose touch with these pension schemes. The good news is we’ve got all sorts of systems in place where we can track down pensions for you on your behalf.

In a  world where we can track everything from the pizza delivery to an Amazon parcel, how do I track my pension?

In the technologically advanced world that we live in, your pension is as easily tracked as  your bank balance.

You can simply log in, you can check your account like you would your bank account. You can see your balance. You can see any deductions. You can see your performance all given in one place.

Additionally, if you utilise the services of a pension adviser, we can monitor this account for you and provide annual reports as to the accounts performance.

What are the costs involved using a pension adviser?

It doesn’t matter where your pensions are invested, whether it’s with a company pension scheme, whether it’s a personal pension scheme, there are going to be costs involved.  Pension schemes are expensive to administer, but you also require the expertise when investing to make the money grow.

If you come in to see one of our advisers, your adviser is going to be upfront and honest about the potential fees that you could face. Some of these fees are going to be policy fees, annual management fees, phone switch fees or transfer charges.

It could be a fixed price or it could be as a percentage price. This will vary case by case and how the administration of your pension will be looked after.

Do you have to pay anadviser upfront or does it come out of your fund?

It’s your choice. If you want to pay for the advice up front, then that’s fine. But if you haven’t got the means to do that or it’s just more convenient, then we can look at take in the fees from the actual investment on the pension fund itself. The key to this is that you will be made well aware of any fees, but they’re all there for setting up the scheme and administration and the ongoing services.

Is this something I can do myself?

Great question. It’s something we do get asked that a lot. I know this may not be applicable to everyone, but each year most householders will call the local gas registered engineer to visit the property to service the boiler. So preferably before the winter sets in, we get this done. The reason we do this is for peace of mind that the heating or hot water will not stop unexpectedly. The thought of being without hot water or heat during the winter is what nightmares are normally made of, especially when you’ve got to get to work. Now take this scenario and assume be left without the correct pension for retirement. So to answer your question, Craig, yes, you can set up your own pension, but would you run the risk of having the incorrect pension for your retirement?

For more retirement planning advice, speak to one of our expert advisers.