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Self Employment
My business is my pension!
In the UK it is well documented that the majority of people are not saving enough for their retirement. The two main problems are that we are living longer and many employers are scaling back employee pension benefits. But one class of worker often overlooked are the self-employed.
Unlike employees, the self-employed do not qualify for the state second pension; nor, of course, do they receive any help with their pensions from an employer. When the Government introduces its new pension initiative ‘personal accounts’ in 2012, all employees will receive a compulsory pension contribution from their employers, but the self-employed will have to rely on their own resources.
If you are self-employed, you might consider that your business is your pension or that you will keep working into your senior years. But most people eventually reach a point at which they are unwilling or unable, to work any more and there is no guarantee that you will be able to sell your business when the time comes. Having a pension means that you are not putting all your eggs into one basket.
Affordability of pension contributions can be a problem for the self-employed, especially in the early years of a business. But you should bear in mind that you are paying lower National Insurance contributions (NICs) than employees who have to contribute to the state second pension.
One problem of being self-employed is that your earnings can be unpredictable. But even if your income fluctuates, it is a good discipline for the self-employed to make regular monthly contributions to a pension, preferably index-linked so that they increase each year. You can then top these up with annual lump sums depending on your earnings.
Some self-employed people are reluctant to lock away their money in a pension in case they need it for other purposes. However, having your pension contributions locked away can be an advantage because there is then no temptation to dip into them. Also, if your business were to go bankrupt or your company went into liquidation, your pension fund is ring-fenced.
For self-employed people looking to buy their own business premises, it might be worth considering a self-invested personal pension (SIPP). You could use the pension to fund the property purchase and this provides a variety of tax advantages, including no capital gains tax when you come to sell the property. However, professional advice is essential in this case.
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