When discussing retirement plan options for self-employed people in the UK, the natural focus tends to be pensions. It is essential to appreciate that retirement plans involve more than just pensions and can be a little more complex for the self-employed. 

While self-employed status provides a degree of flexibility concerning work patterns, it removes some support mechanisms, such as job/income security, workplace pensions and employer contributions for employees.

Retirement planning for the self-employed

In a moment, we will look at the various retirement plan options for the self-employed, but the overarching requirement is planning. There is no automatic sick pay, pension scheme or holidays for the self-employed; your income will be impacted if you don’t work. You can take out income protection and other forms of insurance, but these come at a cost. Consequently, the need to start your retirement planning early is crucial.

Assessing your current financial situation

This is relatively straightforward, assess where you are, where you want to be and how you will get there. As a self-employed person, you need to look at your personal living expenses and those associated with your work. Akin to a car journey, it is essential to know your starting point, a map to get there and your final destination, ensuring you have enough petrol (or funding). This lays the foundations of an effective retirement plan, providing you with different income streams.

Setting retirement goals

It is said that many people “never retire”, but at worst, we all need to take a step back as we get older. Even though it is crucial to set retirement goals, in reality, the goals you set in your early years may differ from those you target just before retirement. While you should be encouraged to be ambitious concerning your retirement goals, it is also important to be realistic and choose achievable targets.

Exploring retirement funding options

There are many different options to consider when approaching retirement when self-employed, which include:-

• Pensions
• Savings
• Assets (such as your home)
• Investments
• Tax-efficient accounts such as ISAs

Many people are tempted to plough as much money as possible into their pension scheme. Even though this can be extremely tax efficient and lucrative in the long term, it is crucial to find a balance between long-term pension investments, assets and funds available at short notice.

The ongoing cost of living crisis has forced many people to divert long-term pension funding to cover their short-term living expenses. This perfectly demonstrates the need to find a balance between long-term investment and finance which is available if required at short notice.

Contributions to your personal pension

Three main types of pension plans are available, all of which are useful when considering retirement plan options for self-employed. They include:-

• Personal pension
• Self-Invested Personal Pensions (SIPPs)
• National Employment Savings Trust (Nest)

While a personal pension tends to be managed by a third party, invested in diversified investment funds, you can take a degree of control. A SIPP is more popular with those who want to be hands-on about their investments, with a particular focus on the stock market. The Nest pension option is more associated with workplace pensions but is also open to the self-employed.

Maximum tax relief when self-employed

Regarding pension contributions, you will receive tax relief on a maximum of £60,000 per annum or up to 100% of your gross annual income, whichever is the lower. If you have earnings above the £60,000 limit, you can carry forward unused pension allowances from the previous three tax years – and receive additional tax relief. This can be particularly helpful as you approach retirement because the contributions immediately receive a boost from the tax rebate.

Savings

As you approach retirement, where possible, retaining an element of savings available at short notice is useful. While this may impact your ability to secure relative spending power, as demonstrated by recent inflation levels much higher than savings rates, it provides a type of insurance policy. The element of “rainy day” funding required will depend upon your circumstances, including other income streams.

To counter a potential reduction in relative spending power, it may be an option to split your savings between a traditional savings account and a fixed-rate fixed-term arrangement. With a fixed-rate deal, in the best-case scenario, the interest paid on your funds is enhanced; in a worst-case scenario, early withdrawal could involve financial penalties such as a loss of 90 days of interest per fixed 12-month term. 

While the idea would be to leave these funds untouched for the entire fixed-rate period, there may be situations where you require additional funding at short notice.

Assets

The ongoing cost of living crisis has highlighted the need to maximise your assets and ensure they fit in with your lifestyle in retirement. For example, the cost of running a relatively large home may not significantly impact your lifestyle during your working life (with a regular income). However, you may feel more financial pressure if your retirement income is reduced.

In this scenario, many people look at downsizing their property or releasing equity to increase immediate liquidity. Traditional downsizing is relatively straightforward, although there may be more to consider with lifetime mortgages and home reversion schemes. These are two of the most common types of equity release in retirement and can significantly boost income.

As a self-employed person, you may also build up several assets during your working life which are of little use in retirement. There are several options, whether you look to dispose of these to increase funds in retirement or gift to third parties as part of your long-term inheritance tax plans. Whatever your thoughts, it is important to take professional financial advice.

Investment strategies

In a typical investment lifetime, we may look towards capital appreciation strategies in the early days, switching to a balanced approach in midlife and more income orientated as we move towards retirement. This is not set in stone, dependent on your broader financial situation and different income streams.

We have also seen recent regulation changes focusing on post-retirement investment strategies. If you have a pension set to payout at age 55, it is conceivable that you could live for another 40 years. The idea of simply cashing in your pension on retirement, and drawing down as and when required, might not be enough. 

It may be sensible to look at a degree of long-term capital appreciation while making sufficient liquidity available to cover your short-term needs. Again, this can be a complex issue which may require additional guidance.

Using ISAs as part of your retirement plan

As we touched on above, pension contributions will attract tax relief to boost your pension plan. Many people also use ISAs as a form of savings for the future, able to contribute £20,000 a year with income and capital gains free of tax. While seen as a long-term investment opportunity, the funds are available at short notice should they be required. 

There is also the option of opening a Junior ISA to save for your children. You can contribute up to £9000 per annum into a Junior ISA with the funds available when the child turns 18. If you are considering inheritance tax in conjunction with your retirement planning, this is perhaps worth discussing with your financial adviser.

Additional income streams

In a perfect world, most of us would prefer to retire into the sunset and enjoy later life without the stresses and strains of everyday work. As a self-employed person, you may take a step back away from active business, but there may be options for consultancy or perhaps educational income streams. The opportunity to pass on your skills and experience to the next generation of business entrepreneurs could create a useful degree of additional income, while also helping others achieve their business dreams.

Reviewing retirement plan options for self-employed

With the best will in the world, even the most detailed and well-organised retirement plan is likely to change in later life. Our lives and goals can change, and the cost of living is often unpredictable, so reviewing and adjusting your broader retirement planning is essential. Then we need to consider inheritance tax and asset protection upon your passing, which can be complex, depending on the size of your estate.

Summary

In theory, planning for pension income in retirement is relatively straightforward, but the income streams of a self-employed person can sometimes vary wildly. When you look at the broader picture, this brings savings, assets and other income streams, such as ISAs and traditional investments, into the equation.

These must all be considered when attempting to protect future income and estimating income variations in different scenarios. Many people assume that retirement planning is another term for pension planning, but this is not true. There are a range of additional factors to consider, and it is essential to look at each element in isolation and as part of the broader picture. 

Your financial adviser will help you consider the appropriate  retirement plan options for self-employed people, Guiding you on your path to retirement and ensuring that you maximise your income and assets to enjoy a comfortable future. 
Interested in finding out more for your retirement? Get in touch at no cost or obligation.