Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
If you own a small business, you might be too focused on the excitement of the everyday to plan too much for the future. After all, UK adults are entitled to a state pension when they retire. However, spending some time considering when you’d like to retire and with how much is definitely worth it in the long run. Creating a personal or workplace pension could make your retirement more financially comfortable and help you to retire at a younger age.
Employees in the UK earning more than £10,000 per year now qualify for automatic enrolment in workplace pension schemes, making it easy to save for retirement.
However, studies have shown that only 31% of the self-employed workforce pay into a pension. Many small business owners fall under the category of self-employed and do not start a retirement plan soon enough.
Pick your small business pension plan
There are several savings options available when planning your pension for a small business owner. All pension schemes in the UK provide some form of tax relief on monies saved.
What’s the best way to save for retirement as a small business owner?
Personal pensions are one of the most flexible options in terms of who can access them and how much money needs to be paid in each month. The pension provider invests the pooled monies within the fund into a limited range of carefully selected investments to generate profit.
Small business owners and the self-employed can establish a personal pension at any time. Personal pensions can exist alongside workplace pensions and other types of retirement savings schemes.
The annual allowance for tax relief on pensions currently stands at £40,000 per year and all pension schemes are accounted for within that allowance. Individuals can receive tax relief based on their current tax band. Any pension contributions over the allowance limit are subject to income tax at the highest payable rate.
Stakeholder pensions are a specific type of personal pension. They typically have contributions that are set at a low minimum level and offer flexibility, which can make them ideal for small business owners or freelancers who don’t earn the same amount each month.
Most stakeholder pensions offer investors a range of funds and investment vehicles to choose from. They will also have a transparent default investment fund which money will be invested into for anyone who does not want to choose for themselves.
As with any investment, the value could go down as well as up, although most stakeholder pension providers will opt for low-risk, low-reward investments to reduce the chances of losing funds.
Self-invested personal pensions (SIPPs) are pension wrappers that hold several different investments within one fund. Similar to personal pensions in many ways, SIPPs offer greater choice and flexibility in terms of where money is invested and have a broader range of investments to choose from.
Many SIPP platforms cater for those with little to no experience in investment by providing a portfolio of ready-made investments to choose from. SIPPs give the individual more autonomy over their retirement savings and offer options to move money around to generate higher rates of return. A SIPP is similar in many ways to an ISA but with the added benefit of income tax relief on savings made within the fund.
NEST pensions, or National Employment Savings Trust pensions, are designed to ensure that every adult in the UK has access to a workplace pension scheme, including the self-employed individual earning lower than the threshold and many others who do not qualify for auto-enrolment.
NEST pensions were established by the UK government after employee auto-enrolment was rolled out.
NEST pensions are available to single-person company directors, freelancers, contractors and other self-employed people between the ages of 16 and 75. NEST pensions can be carried over from self-employed to employed work, provided the new employer is registered under the scheme.
Self-employed contribution to a NEST pension can be made at any time and there are no minimum monthly limits beyond a minimum single payment amount of £10.
How to set up a pension
Setting up a personal pension is relatively simple. However, the process can become more complex when there are several different pensions to keep track of, such as a workplace pension, a personal pension and a SIPP. It can also be worth tracking down any previous pensions that may have been contributed in former employment. For these reasons, many people find it worthwhile to employ the services of a professional financial adviser.
Another consideration is how much to invest in a pension scheme. This depends on how much money you want to be able to access when you retire, as well as what age you are now and what age you plan to retire.
There are free pension calculators available online to help individuals work out how much they need to contribute to their pension each month to meet their desired retirement age and income.
Are there other options for self-employed retirement?
There are other savings options outside of pensions that can be used to generate income or a lump sum upon retirement. Pensions are often the best way to set up a retirement plan for a small business owner as they offer tax relief, which means the fund gets topped up by the government for a percentage of every contribution made.
However, there are other forms of savings funds such as ISAs that offer some tax relief as well. High-interest savings accounts or a low-risk investment portfolio are also options for saving money for the future.
People aged between 18 and 40 can open what is known as a Lifetime ISA, enabling you to save up to £4,000 per year until the age of 50. The UK government contributes a 25% bonus to savings made in a Lifetime ISA up to a maximum of £1,000 per year.
Being savvy with money from creating your business plan to running a business day to day can help small business owners set funds aside for a pension even as they grow their company. Square Payments Software contains all the reporting tools and payment systems a small business needs to stay on top of transactions and understand where money is coming in and going out.
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