Self Employed Pension/Future planning

Shilvara

Hi, this is my first time posting but this site has been a big help to me in past, especially the advice given in the forums. I really hope you guys can help me now!

Basically, I'm 28 years old and self-employed. I've been self-employed my entire working life, so no employer pension or anything. I'm finally in a good position to save money, should have the magic 3 months salary (£6000 [£2000/month]) in savings farily soon. By the end of the year, although hopefully earlier, I should have at least £10,000 in savings.

I'm just not sure what to do with it. From everything I've read, I should put anything above the £6000 into an ISA. Although I know they're changing the rules in April so that ISA's will become more easy access. As in, I could put nearly all my money in an ISA and dip into it if I really needed to on a short term basis.

But should I be putting money into a pension too? I've read so many conflicting views, saying that pensions are a waste of time. Especially if you're self-employed and don't have an employer to top up your contributions.

For the sake of argument, let's assume that I'll have £10,000 in savings by the end of the year, and £15-20k by the end of the next year (if all goes well).

If anybody could give me a few pointers or good suggestions, I'd be eternally grateful.

Thanks!

justme111

I am just a lay member of the public , not investment or pension specialist.
If I were you I indeed approach it from future planning perspective. What you going to live on during your working years and what you going to live on after. Are you going to continue in your field and career for foreseeable future/till the end of your working life ? Are you planning to increase your earnings and how ? Where do you live presently /plan to live in the future ? What about own house /mortgage? You likely to be on basic rate of tax , am I right ?
If so - I would divide surplus income into two streams. One I would place into S&S ISA with a view to keep into until retirement. Another I would put into the same investments buy into pension wrapper. (Both ISA and pension are just wrappers for your money with benefit of pension being that you do not pay tax on your contributions). I probably would divide these streams leaning heavier on isa side , putting into pension the amount which would not hurt .
All of the above is apart from cash savings that you were talking about. Those I would place wherever there is maximum interest rate , currently in a few accounts (lloyds club 5% for amounts up to 5 000 for example). The point of ISA for cash is not to lose one's allowance as the amount one can contribute to it is limited and no tax is paid on the interest received. With your amounts it is irrelevant as the whole of your cash savings could be moved into isa any year you wanted. Interest you would receive is higher with current accounts than what you currently get in isa accounts even after deducting tax (with new rules not taxing small/ish interest income it becomes even more so).
In resumen - cash savings you made are not for future. Future ones would need to be accumulated steadily and slowly in investments in both isa and pension wrappers and may be phisical property

MadMat

Speaking as another self employed person, although a little older then you . . .

I've gone for a little bit of everything approach. pensions are not as attractive to us self employed as there is no employer throwing money in the pot too, but the tax relief is still worth having.

I split my savings between cash / pension / SSISA /and a little bit of peer to peer lending.

Pension is great, as the government throw in tax relief, but the income from it is taxable.

SSISA theres no tax relief, but any income from it later in life is tax free. so to me the ideal thing would be a big enough pension to use up your personal tax allowance, and then the rest of your income from the SSISA

At the age of 28 I'd put more towards the SSISA than pension, a lot can happen between the age of 28 and retirement where you might regret locking too much cash away!

Mat

greenglide

If you are self employed paying into a pension does have the very real benefit that should the worst happen and your business folds the pension fund cannot be accessed by anyone trying to get money while an ISA can. A pension also puts the money beyond you reach as well which can stop you doing silly things as well.

I assume you really are self employed as a sole trader or partnership rather than trading via a limited company? The situation is very different if you do but lots a people come here claiming to be self employed when if fact they aren't.

grey_gym_sock

the first thing is to divide your money into short-term, i.e. emergency fund, any spending planned within the next few years, perhaps money for house deposit if you might buy within a few years - vs long-term, i.e. money you won't need for at least 5, and preferably 10 years.

short-term money should be in cash. at the moment, you can get better interest rates on cash in current accounts than in cash ISAs.

long-term money may be better put in funds that invest in shares, bonds, etc. the downside is that investments will sometimes go down in value, but in the longer term they tend to go up more than down, and do better than cash. the 2 obvious places to hold investments are S&S ISAs and pensions.

personally, i would not put anything in a pension if i were 28 and a self-employed basic-rate taxpayer, because i'd only get 20% tax relief on the contributions, and wouldn't get access to the pension for a long time. though i would probably put some in if i were a higher-rate taxpayer, when the tax relief goes up to 40%.

however, that is partly because i am a natural saver. if you are inclined to spend your money carelessly at some stage, a pension does prevent you from doing that.

atush

I think it really deoends on what your SE is?

As said in post 4, if you could be sued by a client, or your business fails with debt owed, then a pension would be safe from predation, whereas savings and isas would not.

Not to mention if the business fails and you need benefits for a period- pension fund wont count as savings.