Independent financial adviser Simon Claxton, of Reading-based Macbeth Financial Services Ltd, answers the questions that matter most
Why do so many sole traders fail to provide for their retirement?
Simon Claxton (SC): “Many mistakenly believe their business is their retirement fund. But, what if the business fails or doesn’t perform as well as expected? And, if they are ‘the business’, can it survive if they leave someone else to run it?
What are the key dangers of not paying into a private pension?
SC: “You’ll be reliant solely on a State Pension, which might not be enough for your wants or needs. And, you can only get it when you reach State Pension age. Furthermore, you need 30 ‘qualifying years’ of National Insurance contributions or credits to get the full basic State Pension. Otherwise you’ll get less.”
What about the tax benefits?
SC: “While giving you more money to live on when you retire, contributing to a private pension can be a tax-efficient way to get more out of your business until you retire. There is tax relief on contributions, and growth is tax-free growth, while you may be able to access some of your pension fund as a tax-free lump sum.”
Is it ever too late to start contributing to a private pension?
SC: “Depends on your age, when you’ll retire, how much you can afford to contribute each month and the pension you choose. But, generally speaking, whatever you contribute, you’ll be better off when you retire, to a greater or lesser extent. Pensions are just one aspect; other assets could also provide an income when you retire or semi-retire.”
Do sole traders have to ‘auto-enrol’?
SC: “Not if you’re the only person working for the business. If you have one or more employees aged over 22 earning more than £10,ooo a year, you and they are subject to auto-enrolment rules, and must be enrolled in a suitable pension scheme. Failure to comply may lead to a notice and penalty against your business.”
Are private pensions the only option?
SC: “ISAs can be another tax-efficient savings option. Although they’re not eligible for tax reliefs on payments made, you don’t pay any income tax when they’re paid out. They can be used in conjunction with a private pension.”
How much will I need to pay each month?
SC: “Generally, you pay what you want to pay or what you can afford to pay. There is no maximum, but tax relief is limited. Your business can make contributions as well, which, obviously, means you get more when you retire or semi-retire.”
What will the likely returns be?
SC: “The longer money is invested, the greater the rewards are likely to be – but nothing is guaranteed. A pension fund might not perform as well as expected. The pension you choose will be determined by your attitude to risk. Understand that risk fully before deciding.”
Should I also think about the future of my business, whether I plan to sell it or pass it on to my family?
SC: “Definitely. Most people won’t take full retirement in the traditional sense. The final salary pension model is mostly broken and unaffordable for all but the biggest employers these days. Retirement is a post-World War Two idea. Most of us will go back to working until we’re physically unable to do so. We’ll use all our assets – pensions, possibly our homes, etc – to subsidise our reduced earnings when we work fewer hours.”
What key advice do you offer to sole traders about planning for their retirement?
SC: “Get expert advice and speak to an IFA when considering your options, they can help you choose a pension from the whole market. Create a life plan, detailing when you’d like to retire and how much income you need. Consider all your assets as part of your plan, because your pension might not offer a complete solution.”