Being self-employed brings a range of benefits, with one of the biggest advantages being your own boss. However, this can be a disadvantage when it comes to pensions.
All employers must provide a workplace pension scheme for their eligible employees. This boosts the amount of money their employees are saving towards retirement.
If you are self-employed, you will not have an employer adding money to your pension in this way.
Despite this clear disadvantage, only 31% of self-employed professionals pay into a pension.
To make sure you have the retirement you want, it is important to save, and a pension is one of the most tax-efficient ways to save for your retirement. So, read on for five ways financial planning can boost your pension.
5 ways financial planning can boost your pension if you are self-employed
- Having a plan gives you focus
Financial planners will spend the time getting to know you and aligning your needs, values, and financial goals in preparation for retirement.
They will create a bespoke plan for you, including your short- and long-term plans and extensive advice and recommendations for how to achieve each goal.
Your financial plan will give you a focus while managing your money. Following through with your plan takes time and dedication, but it will likely pay off in the future.
A survey from Royal London, conducted with the International Longevity Centre (ILC), revealed that the benefits of financial advice could see some people benefit from a 24% boost in their pension wealth. There is also evidence to suggest that forming an ongoing relationship with an adviser leads to better financial outcomes.
- Helps to improve your discipline to save
After receiving financial advice from your financial planner, they will maintain regular contact with you to ensure you are meeting your goals and saving enough to maximise the financial benefits.
They will be the equivalent of a gym partner – there to encourage you to achieve your best for your financial fitness!
The study by Royal London and ILC has shown that individuals receiving regular financial advice had a whopping 50% higher pension wealth compared to those who only reported seeking advice once.
- Maximises the tax benefits
Your financial planner will provide you with information on all the tax relief available to you on your pension, so you do not miss out on any benefits.
They will offer guidance on your Annual Allowance and whether it is possible to still benefit from tax relief due to carry forward. This will allow you to make the maximum number of contributions allowed.
In the 2022/23 tax year, the Annual Allowance is £40,000 or 100% of your annual earnings, whichever is lower.
You can continue to pay into your pension once you hit this limit, but you will no longer be able to do so in a tax-efficient way. Any contributions over your Annual Allowance may incur a charge.
The “Annual Allowance charge” essentially claims back any tax relief you receive on contributions over this limit.
According to PensionBee, higher-rate taxpayers in the UK are missing out on £769 million each year in unclaimed pension tax relief. Obtaining financial advice from a financial planner will help prevent you from missing out on this kind of valuable relief.
- Ensures you have a well-diversified portfolio aligned with your risk profile
A financial planner will review you pension portfolio to ensure it is invested to provide an optimised investment return. Diversification is key if you want to achieve the best possible risk adjusted return.
As you grow older and approach retirement, it is not uncommon for you to want to gradually reduce the overall level of risk. Making sure you achieve the maximum return for a given level of risk will ensure that your pension can still provide good returns once you are in retirement.
A financial planner will take account of your personal circumstances before helping you to assess how much risk you should be taking within your pension to maximise your pot.
A financial planner will also look at the level of risk of your portfolio. Regular reviews of your portfolio should help you to see a good return on your pension and can be adjusted according to any changes in your personal circumstances.
- Can increase your wealth
Many people believe hiring a financial planner is only for the wealthy. However, the research by Royal London and ILC has found that people who are “just getting by” boosted their financial wealth by 35% in comparison to the more affluent, who increased their financial wealth by 24%.
This indicates that no matter what your financial wealth is now, taking financial advice will help to improve your financial wealth in the future.
To make that point even clearer, the same study indicates that on average people who took financial advice were £47,706 better off over the course of a decade than those who had no professional advice. This rise in financial wealth is split between an increase in pension wealth (£30,991) and an increase of £16,715 in other financial assets.
Remember to factor in the State Pension to your retirement planning
Of course, self-employed people are also entitled to the State Pension.
To qualify for a State Pension, you will need at least 10 qualifying years on your National Insurance to get any State Pension and at least 35 years to receive a full State Pension.
For the current tax year (2022/23), the full State Pension is £185.15 a week. Totalling £9,627.80 each year. However, the actual amount received depends on your National Insurance record.
While the State Pension is a valuable source of retirement income, as a self-employed IT professional, it is unlikely to be enough to sustain the life you want in your retirement.
A financial planner will help you plan for the lifestyle you would like in retirement
Gaining financial advice from a qualified financial planner will make it easier for you to plan and save for the future and to achieve the lifestyle you would like in retirement.
If you would like to find out how we can help IT professionals to create a financial plan for retirement, please get in touch. Email firstname.lastname@example.org or call us on 01275 462 469.
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.