There are lots of gaps at the moment — savings, pensions, retirement etc. But there’s a worrying savings gap threatens the future of hundreds of thousands of self-employed millennials. Only a third of self-employed workers aged between 23-38 currently have some form of pension saving, according to Fidelity International’s report ‘Generation Self-Employed’.
Be your own boss
Being your own boss seems to be a compelling prospect for millennials in the workforce with 30% saying they would like to work for themselves in the near future. However, of those who are working for themselves, their finances do not seem to be in the strongest position. While running your own business or being freelance has many perks, the practical financial provisions are no longer organised by an HR department. As a self-employed worker, you are solely responsible for your own pension provision.
The good news is that you are entitled to all the same tax reliefs on pension contributions as employed people. As a reminder, you get a tax top-up when you contribute to your retirement pot, at the rate of 20%, 40% or 45%. So, every £800 paid in by a basic-rate taxpayer, for example, will result in a contribution of £1,000. Higher-rate taxpayers can claim back an additional £200 through a self-assessment form, boosting their return even higher. This means your money can grow free of tax for decades.
The government gives you money!
These tax breaks are unrivalled. So even if things are tight, it is better to save something rather than nothing. The golden rule is that the earlier you save, the more time your money will have to grow. Saving just £100 a month from the age of 25 would result in a pension pot of £152,602 at the age of 65. Delaying retirement saving until age 30 would see the fund value at 65 drop to £113,609 and leaving it until age 40 would mean a fund value of £59,551. These figures are based on growth of 5%.
Some might feel put off by the fact saving in a pension means locking their money away until the age of 55. It might appear more appealing to save in a place where your money isn’t under lock and key. In a tax-free Isa you can save a maximum of £20,000 – in the current tax year – and access the money whenever necessary. But remember, the trade-off for locking up your cash until 55 is the generous tax breaks on contributions.
How to set up a self-invested personal pension (Sipp)
You can find the best value Sipp provider using the comparison service on this website. There are plenty of providers to choose from, including Fidelity, AJ Bell and Hargreaves Lansdown. Opening the account will require some quick form-filling. You’ll need your national insurance number and all the other usual details — name, address and date of birth.
Once the account is open you can fund the account with a lump sum via debit card or set up a regular direct debit from typically £25 a month. Don’t forget, in years to come, make sure you review and increase contribution levels when you can.