5 steps the self-employed should take to prepare for retirement

More people are becoming self-employed and it’s a step that’s been linked to improved wellbeing. But it can mean your financial security falls, particularly when looking ahead to retirement. For self-employed workers, it’s important to take steps that can ensure your financial security in the long term.

According to research from the Institute of Fiscal Studies published in July 2020, wellbeing improves markedly upon entering self-employment. Job satisfaction was found to rise by 1 point on a 7-point scale. The improvement is even found among those who did not expect to start their own business and may have been ‘pushed’ into self-employment.

Self-employment can offer many benefits that lead to improved wellbeing, from being able to work flexible hours to focusing on projects you enjoy. It’s part of the reason why self-employment figures have increased. One in nine workers is solo self-employed, where you work entirely on your own with no employees, today, up from one in eleven in 2008.

Yet, self-employment comes with drawbacks too. One of these is that your income may be affected, and you don’t benefit from a Workplace Pension. While your focus may be on short-term finances, it’s essential you think about what happens when you retire. Here are five things to do to prepare for retirement.

1. Think about your retirement

It’s impossible to properly plan for retirement if you haven’t spent some time thinking about it.

The first question to consider is when do you want to retire and is this realistic with your job in mind? For some, retiring completely isn’t for them. But you may still want to wind back tasks and have more time for yourself. Setting out a time frame can help ensure you’re on track and it doesn’t have to be set in stone.

You should also think about how you plan to spend your retirement and what this means for your income needs. How much income would you need to cover essentials and what extras do you want to meet your lifestyle goals? This can give you an idea of how much your pension needs to deliver in income each year.

Remember, inflation means the cost of living will rise throughout your retirement and this should be factored into your plans.

2. Set a pension goal

With a clear idea of when you want to retire and the lifestyle you want, you’re in a better position to understand how much you’ll need in your pension when you retire. There are still numerous factors to consider here, from how long your pension will need to last to how investment performance will help you meet that goal.

A financial planner can help you understand how much you need with your goals in mind. The final sum can be daunting at first glance. But once you break it down into regular contributions and understand how investments will support growth, it can seem far more achievable. Contact us to talk about the size of your pension and what it means in retirement.

3. Open the right pension for you

With a pension goal in mind, open a pension and make regular contributions. There are several pensions to choose from, including a Personal Pension, Self-Invested Personal Pension and Stakeholder Pension.

Each of these pensions has pros and cons to weigh up. Take some time to research the options and discuss them with a financial adviser to choose the right one for you.

Your pension won’t benefit from employer contributions, but you will still receive tax relief. This is given at the highest rate of Income Tax that you pay. It can significantly boost your retirement savings over the long term. If you’re a higher or additional rate taxpayer, you’ll need to claim the extra tax relief through a self-assessment tax form.

4. Protect your income now

While we’re thinking long term when saving for your retirement, the income you have now is important. After all, this is where regular contributions will come from and you may be reluctant to tie up additional money in a pension if you don’t feel secure now.

Taking out appropriate financial protection products can give you peace of mind. Income Protection Insurance, for instance, can provide a regular income, based on a percentage of your usual earnings, if you become too ill to work. It can provide confidence in your current financial situation and can deliver benefits long term. Before you take out a financial protection product, you should assess what your priorities are. There is a range of different products to choose from and you should take the time to pick the right one for you.

5. Seek advice

Planning for retirement can be complex for anyone. When you’re self-employed, it can be even more complicated. Seeking financial advice can help you make the most of your savings with both your security now and retirement in mind. It’s a step that can help you see where retirement fits into your wider plans and the lifestyle you can expect.

If you’re self-employed and would like to discuss what you can do to improve your retirement, please get in touch. We’re here to help you make the most of your income to meet goals now and in the future.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, 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.