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Friday, 18 April 2014

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Make adequate pension provision your business

Working closely with those who are self-employed, I often hear people say “my business is my pension”.

Imagine this scenario for a second if you will – a chap who has built up his business through years of hard work has been taken seriously ill in his 60s. He is the sole proprietor of the business and was expecting to sell up to fund his retirement. The illness means that his business is now under threat and there may be no retirement income to tide him through ill health.

This illustrates a significant issue for the self-employed, especially for smaller enterprises, that businesses often don’t have a real sale value. Frequently the business is the person themselves and the contacts they have established, so when they are taken out of the equation there is nothing tangible for a prospective buyer to acquire.

Business owners also have a tendency to value their business much higher than buyers are maybe willing to pay. Even if you are already saving something towards your retirement, but at the back of your mind you think your business will be your retirement pot, then your current savings may not be enough. Most people, whether employed or self-employed, underestimate the amount they need to put aside for retirement. Research from retirement income specialist MGM Advantage has put a figure on this, revealing that the average retired person feels they need at least £140 per week, or around £7,300 a year, to be financially comfortable.

For a 65-year-old man to buy a £7,300 inflation-protected annual income, on a joint-life basis, to give his spouse an income in the event of his death, he would need to have saved at least £200,000 in his pension. (Source: Standard Life).

It may be worth considering pension savings in the context of percentage of salary. Employed people who are members of their employer’s pension scheme usually contribute a percentage of income in combination with their employers’ contributions. The recently introduced auto-enrolment regime will ultimately reach an aggregate minimum of eight per cent of salary, so this may be a useful starting point. According to Standard Life, if a 22-year-old earning £26,200 (the median gross annual earnings for a full time employee) started saving eight per cent of their salary today into a pension, they could achieve a fund of £279,000 in today’s terms by age 67. This assumes a growth rate of 6.5 per cent, inflation each year of 2.5 per cent, earnings increasing at four per cent a year and an annual management charge on the pension contract of 0.5 per cent.

And even before the latest round of public sector pension reforms, pension benefits for all members of the NHS, teachers, local government and civil service pension schemes required considerably more funding, with contribution levels averaging 5.1 per cent. for employees and a hefty 15.8 per cent for employers.

Bearing this in mind, for the self-employed with no employer funding of your pension, how does your retirement planning look?

  • Investment values can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future results. For independent financial planning advice email moneytalk@armstrongwatson.co.uk or call freephone 0800 195 2161.

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