How self-employed people can save for their retirement

21 October 2012

If you're self employed, you're on your own when it comes to retirement. So what should you do to ensure that you're not in poverty when you retire?

 The latest independent research from Prudential highlights the fact that almost half (46%) of UK business owners or 1.3 million people – have no private pension savings to support them in retirement, which is shocking.

Out of those who have failed to make any private pension provision, more than half (54%) said this was because they simply could not afford to set money aside. Nearly one in five (18%) say they don’t have a pension because they will never retire, and 9% claim they have sufficient funds in a company pension from previous employment, according to the research.

It’s really important that you try and build up some savings for your old age. Some business owners say they don't need a pension because they'll never stop working, but that's not realistic. You may not have the health or the energy to keep working beyond 70.

Your retirement savings don’t have to be in a pension if you don’t want to go down that road – you could use ISAs instead if you prefer. Read more in Pensions vs ISAs: The best way to save.

But it’s essential that you try and do something. Otherwise you’ll be totally reliant on the state in your old age. Do you trust the government to look after you?


So what do you need to consider when planning your retirement?

First of all, it is important to consider how much money you’ll need each year of your retirement. When you are older, you might have an outstanding debt, eg a mortgage, a long-term medical condition or dependent children.

The following need to be factored in when planning for your retirement:

  • The age at which you retire. If you retire say, when you are 55-years-old, you’ll get a lower income from your pension pot than if you were retiring at 65
  • How much basic state pension you will receive (based on how many years of national insurance contributions you have made)
  • Other assets you may have, such as savings and property
  • Where you might live when you retire. Will you emigrate to sunnier climes like Spain or Greece, Australia?


What are your options for retirement as a self-employed worker?

Employed workers get a better deal when it comes to pensions. Many employers currently make contributions to employee pension schemes and that's becoming compulsory under the government's new auto-enrolment scheme. (That's as long as the employee contributes too.)

As a self-employed person there are your main options for giving you an income in retirement:

  • Relying on the State pension. The government provides a state pension – currently £107 a week in 2012/13 - subject to meeting certain qualifying and eligibility conditions.
  • Build an ISA portfolio while you’re working and live on that in your old age
  • Selling your business and living on the proceeds
  • Save into a defined contribution pension while you work. This will give you a pension pot that can then give you an income when you retire. The cheapest pension vehicles tend to be stakeholder or personal pensions.

But if you want more flexibility in how you invest your pension, you could go for a SIPP (Self invested personal pension). Read more in The best Sipp for your retirement.

If you’re not sure what your next step should be, there are several websites where you can get more information including: The Money Advice Service, The Pensions Advisory Service, and HMRC.

If you can afford it, you can also speak to an independent financial advisor or accountant about what you are planning to do in your retirement.

Other steps you could take to include:

  • Request a state pension forecast from the Department for Work and Pensions (DWP) and consider if it is worth paying in backdated National Insurance Contributions (NI) for either yourself or your spouse.
  • Do your homework! Consider what type of income you want in retirement eg income drawdown or annuity.
  • Look at someone who is self-employed and has retired “successfully and comfortably” in your eyes and try and work towards emulating their retirement lifestyle.

Failing that, you could always win the lottery!



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