Pension advice for self-employed

Horsin

Good evening .

This is my first post on MSE but I've been a lurker for a while!

Until July of this year I had two jobs: 1 part-time for the local council and 1 working freelance.
I paid into the council pension scheme and also paid National Insurance contributions for my freelance side.
I have now gone totally freelance and need to decide what private pension to pay into.
A few facts: I am a 44 year old single (separated) mother of 2 (one just started Uni). My Local Government Pension will pay me £751/ year. I am not a risk taker. I have 10 years remaining on my mortgage. My total income (including maintenance) is around £25k/year.
I have started to look at options myself (following MSE advice) and was interested by Cavendish Online. I followed the link for Friends Life and thought their Fixed Interest NGP looked feasible.....and then I started to stall.
For a possible pension of around £10,000/year what would I need to invest? If the investment goes belly up, do I at least retain my initial investment even if I lose the interest? Would I be better of simply putting savings aside (I have an emergency fund set aside already, as per MSE advice:p).

Any help or advice, however in depth or simple, would be much appreciated!

Thanks

Your_Hero

Horsin wrote: »

A few facts: I am a 44 year old single (separated) mother of 2 (one just started Uni). My Local Government Pension will pay me £751/ year. I am not a risk taker.

You should and must take risk, particularly as you are aged 44. You have 21 years until age 65 (assuming this is your intended retirement age). Imagine having cash savings under your mattress for 21 years. Money in the bank is no better. It is not "risk-free" either. You are taking on huge inflation risk.

I suggest you take some time to learn about risk and reward.

For a possible pension of around £10,000/year what would I need to invest?

Too many variations to give you a definitive answer.

Let's just take a simple scenario, and assume you are 65 today. Think how much you would need in your bank to draw out £10,000 per year. Surely the next question is: How long am I likely to live for?

Even if you assumed a 30 year life expectancy from age 65, you would need a minimum of £300,000 in the bank, assuming a flat £10,000 withdrawal a year. For simplicity, we've ignored inflation here, but you need to consider the effects of rising prices and cost of living.

If the investment goes belly up, do I at least retain my initial investment even if I lose the interest?

Depends what you invest in. If you invest in risk-based funds (which covers 99.9% of all funds) then no. This is the key feature of investments and the risk versus reward relationship.

Would I be better of simply putting savings aside (I have an emergency fund set aside already, as per MSE advice:p).

Absolutely not.

dunstonh

I am not a risk taker

Everything has risk. Just a varying level. At age 44, putting all your money in cash, for example, could be considered higher risk than a multi-asset selection of investments. Cash doesnt have investment risk but carries higher shortfall risk and inflation risk.

I followed the link for Friends Life and thought their Fixed Interest NGP looked feasible.....and then I started to stall.

That would be a very bad way to invest.

If the investment goes belly up

What makes you think unit linked investments will go belly up? If they did, then you probably wouldnt care as we would be back to the dark ages. Money wouldnt matter.

kangoora

I can try and give you some (very) rough figures. I'm assuming you mean £10k/year on top of the state old age pension and that you will retire at 67 years old.

The basic assumption is you draw down 4% of your total pension pot per year to achieve your pension so as not to exhaust it. If you intend to draw down to zero, probably not recommended as you can't forecast the date of your death to coincide with zero money remaining, then you can withdraw more per year

You're starting with £750/year - so you need £9,250/year additional income.

Multiply that by 25 (i.e. as £9.25k = 4%) to get to £231, 250 which is the pot that should be OK for your needs but doesn't allow for any contingency i.e. just enough.

Then assume the pension pot grows at 3% above inflation with each monthly contribution. So, for the next 23 years you need to contribute £600/month, this will equate to a pot of £238k using monthly compounding.

HMRC will gross up some of that with tax relief so you actually only need to contribute £480/month net (£600 x 0.8).

This is very basic to give you an idea of what sort of numbers you need to be looking at for £10k.

If you increase your monthly payment in line with inflation you'd be building in contingency you may need and, ideally, building a larger pot.

Don't take this as gospel, the stock market could boom or crash several times in this period and the key period would be the year or 2 before you retire. If you hit a 30% drop in those years then all the calculations above would be pointless as they are based on an average return of 3%.

Of course there are options like equity release, dropping down spending plans as you get into your 70's/80's, drawing a little more each year so gradually running down the capital - all could be considered when at or near retirement.

Horsin

Thank you for the replies - I realise I have a lot to learn, look at and think about here!

I know that I don't want to simply rely on the State Pension to get me through after retirement, and I realise that there is going to be a certain amount of risk depending on how I decide to invest - I guess I've just always been a low-risk taker when it comes to mortgages and funds etc.

Any advice on Pension funds that I would be sensible to look at, as oppose Investments? Or are they almost one and the same ?

xylophone

Don't forget state pension

https://www.gov.uk/new-state-pension/overview

Horsin

For instance, what are your opinions on the Virgin Money Personal Pension (a stakeholder pension)?

I know that I am going to frustrate some of you as I seem pretty clueless about this whole process . The truth is, I am! BUT, I don't want to be one of the many self-employed who don't think about their retirement. From what I have read there is a HIGH percentage of us that have no retirement pension plan in place and in my opinion it is due to the fact that it all feels very confusing!

If you are employed then you will often opt for your employers pension fund as it is the easiest option. I would suspect that many employees do not fully understand their pension plans. As a self-employed individual I am having to research, eliminate and decide with no real financial background. I admit that I am finding it hard, but I am determined not to bury my head and just ignore it .

Horsin

xylophone wrote: »

Don't forget state pension

Thanks xylophone. I have looked up any info on that before. I have been making voluntary contributions for at least 22 years now and will continue to do so.

I actually found the Virgin website very good for telling me how much my shortfall is at the moment for the amount I would like to have per year in retirement as it included my State Pension.

Now I've got to work out how best to make that shortfall up....:cool:

dunstonh

For instance, what are your opinions on the Virgin Money Personal Pension (a stakeholder pension)?

Pretty much one of the worst pensions available on the retail market. Expensive for DIY and poor investment options that really suit no-one (no multi-asset fund for the inexperienced investor and no choice for the experienced investor).

Horsin

dunstonh wrote: »

Pretty much one of the worst pensions available on the retail market. Expensive for DIY and poor investment options that really suit no-one (no multi-asset fund for the inexperienced investor and no choice for the experienced investor).

You suggest I keep looking then.....:cool:

xylophone

http://www.telegraph.co.uk/finance/personalfinance/11174288/Self-employed-Youre-stumbling-into-pensions-nightmare.html

might be worth a look.

https://www.moneyadviceservice.org.uk/en/articles/pensions-for-the-self-employed

https://www.unbiased.co.uk/ If you are looking for an IFA.

State pension after 5/4/16 https://www.gov.uk/new-state-pension/overview