There are plenty of misunderstandings when it comes to pensions, but the reality is that there’s no time like the present when it comes to getting started in saving for retirement. With the right level of commitment and a little bit of discipline, you can build yourself a healthy pot for the future even if you get started in your 30s or 40s.
For the estimated 4.5 million self-employed workers in the United Kingdom, saving into a pension can be a tricky business. Because there are no automatic enrollment schemes that employers are required to deploy, millions are falling through the net when saving into a pension.
According to data compiled by The Guardian, just 4% of self-employed people in the UK are currently putting money into a pension, leaving many workers throughout different industries at risk of losing out when they retire.
But if you’re in your 30s and 40s and thinking about life after retirement, you certainly haven’t left it too late to start setting yourself up with a pension that can transform your level of comfort later in life.
Tax Advantages of SIPPs
The great thing about pension saving as a self-employed worker is that the HMRC provides automatic ‘tax relief’ top-ups for savings, which can substantially boost your pot over the years before you retire.
Because you won’t have a workplace pension that’s managed on your behalf by your employer, you can open a Self-Invested Personal Pension (SIPP), which allows full control over where your money is invested and the type of risk you want to take on.
However, SIPPs can also be handled on your behalf, and opening a managed pension from a trusted provider can be really rewarding if you’re unsure of where to start.
Your government tax relief works when you make contributions to your pension pot. Here, the government will automatically add a 25% tax relief bonus to your pot to refund basic-rate tax. This mechanism also means that higher-rate taxpayers can claim an extra 20% to 25% back when it comes to filling out their Self Assessment tax forms.
There are contribution limits to keep in mind. In the current tax year, you can save up to 100% of your earnings, or a maximum cap of £60,000, whichever figure is lower. You’ll still get tax relief up to this allowance.
This also means that even if you get started in your 30s and 40s, you can still claim significant amounts of tax relief ahead of your retirement. But you should also keep in mind that your money will be locked away until you turn 55 (rising to 57 in 2028), at which point 25% can be taken out as a tax-free lump sum.
Building Your Pension
The best way to build your pension if you’re getting started a little later in life is to create a strategy that’s easy to follow without running the risk of causing financial discomfort while you’re saving.
One approach that some pension savers adopt is the Half-Age Rule. This involves taking your current age, halving it, and investing that percentage into your pension. For instance, if you’re 40, you would allocate 20% of your earnings towards your savings and so on.
This sets you up with a staggered approach that can really help to build a large nest egg for the future.
Sometimes life can be a little too expensive to allocate higher amounts to contribute to your pension, and if you feel that you’re struggling to keep up with the Half-Age Rule, there’s nothing wrong with creating a more adaptable approach that would be easier to stick to. After all, it’s far better to build good long-term habits when it comes to saving rather than giving up when your expenses stack up.
Anticipate Drawbacks
There are some things that self-employed workers should keep in mind when building their pension savings.
One of the biggest factors that self-employed people are more likely to experience is that they may not have a fixed income each month. It’s for this reason that using a percentage-based savings strategy for your pension is important. You could also set a minimum earnings level before making contributions to ensure that lower-earning months don’t leave you too hard up for cash.
You should also make sure that you have emergency savings in place before building your pension pot. After all, things can go wrong, and if you don’t have easy access to funds, you could be more vulnerable to unexpected expenses.
Finally, you’ll need to keep inflation in mind when building your pension. Whether you invest in a SIPP or opt for a managed personal pension, you should always check in on your portfolio to ensure that it’s rising higher than the rate of inflation to grow your savings in real terms.
To help protect your portfolio against inflation, consider including assets that have historically held their value during periods of rising living costs, such as equities, real assets, or index-linked securities.
Building a Strong Pension
With the right mentality and approach in mind, getting started with pension saving in your 30s and 40s should be a doddle. Just be sure to set yourself up with a SIPP that’s geared towards your retirement goals and risk appetite, and create a plan to save consistently into the future. With the help of government tax relief, you can turn your savings into a strong pension pot.
It can be difficult for self-employed workers to focus on their pensions when their income may be less predictable each month, but getting the right strategy in place can make all the difference when creating a healthy pot to retire with.
Guest writer
