Five reasons why pensions work for the self-employed

Jamie Smith-Thompson gives five reasons why self-employed people should take advantage of the power of their pension...

The picture-perfect view of being self-employed is understandably attractive: the notion of being your own boss and doing what you love under your own steam.

In fact, the number of self-employed workers in the UK has steadily risen from 3.3 million in 2001 to 4.8 million in 2017, according to latest figures.

However, recent statistics also show that most self-employed people have little confidence in their pensions and almost half (45%) of self-employed workers aged between 35 and 54 have no private pension at all.

The reality is that your pension is one of the most powerful saving tools available and has many advantages that other saving methods don’t. Therefore, those who are self-employed and not using a private pension could be missing out on a lot of benefits in later life.

To help the self-employed, pension advice specialists Portafina has outlined five reasons why they should take advantage of the power of their pension.

1. Compound interest

Understanding what compound interest is and how it can benefit you will help you stay ahead of your peers when it comes to your savings. Put simply, when you save money it should earn interest. This interest can then earn more interest.

The average investment growth (interest) you get in a pension tends to give your savings more opportunity to grow than other tools, such as a standard savings account or a cash ISA. This boosts the growth you can enjoy from compound interest.

2. Tax relief

Tax relief is one of the greatest USPs of a pension as it immediately increases the value of your contributions, which is then multiplied year after year by compound interest.

For basic-rate taxpayers, when you contribute to your pension the government adds back the 20% that is usually deducted from your earnings. This means that if you add £80 to your pension the government will top this up to £100. Higher and additional rate taxpayers can also claim back the extra 20% or 25% they pay in income tax.

3. Take back control

Being self-employed means you’re in control of many things that your peers maybe aren’t. Saving into a pension can help extend that control to later in life, by giving you more money and income options to choose from than relying on your business or assets like property.

4. Don’t rely on your state pension

Self-employment might mean that you don’t qualify for a full state pension as you pay a different level of National Insurance to those who are employed.

Fully utilising a private pension and the power it gives you will mean you could be in a position where you can be sure that you won’t have to rely on the state pension in the future.

5. History shows us that stockmarkets work

There’s a good chance that a proportion of your pension is invested in the stockmarket. And when it comes to stockmarkets, news headlines are often full of sensationalist doom and gloom. This can understandably cause worry and fuel people’s distrust of pensions.

It’s really important to understand that going up and down all the time is what stockmarkets do and history shows us that, as a whole, they have always tended to rise over the longer term. The best thing to do is pay as little attention as possible to short-term news headlines and trust decades worth of reality.

Portafina managing director Jamie Smith-Thompson says: “I’ve been a sole trader and it can be tough. Well-meaning friends talking about how they wished they had the freedom of being their own boss and ignoring the huge uncertainty that can come with being self-employed. When’s the next job coming in? Will clients pay on time? Will I have enough to get by in the future?

“Pensions are extremely powerful and if yours is properly managed you can look to your financial future with much more certainty. And it could mean even more flexibility and freedom when it comes to the choices you have in life.

“It just doesn’t make sense to ignore or neglect your pension, especially if you are self-employed. And when it’s so easy to find out how your pension is doing and how to get it working as hard as it can for you.”