Pensions for sole traders

A small business should think about their pension

So you're a sole trader and you've heard a lot in the news about pensions. You know that you probably need a pension of some sort. This article briefly outlines some of the points of note when considering a pension as a sole trader:

There's a lot of press regarding pensions at the moment. The U.K. Government has legislated that even if a Company has only one employee then it must offer a workplace pension. On the one hand this is a sensible suggestion. Individuals should not hope to rely on the state pension given our ever aging population and the pension liability that grows with it.

Whilst the intention to encourage everyone to have a pension is a good thing the problem is that in the UK many individuals are classed as sole traders. Being a sole trader means that there is no employer to match any contributions or recommend where to invest your pension. So what should you do?

How much should a sole trader put into a pension?

It has been estimated that in order to sustain your current standard of living beyond employment and into retirement it is necessary for the average person starting work to put between 15%-20% of gross income into a pension. These figures will be even more for those who are older. 

The amount seems like a lot but is absolutely necessary if you want to ever be able to retire. One of the benefits of putting into a pension would be that your tax liability becomes smaller so there is some benefit to putting into your pension in the short term as well.

Stakeholder pension

Don't let yourself be talked into any expensive pensions. You shouldn't need anything too complicated and you certainly don't want to be paying too much for the pension. Anything over 1% in management charges could potentially be too much. You must consider if the returns are going to be sufficient to cover the management charges and cover the fact that you are taking on additional risk.

You should investigate stakeholder pensions. These are offered by most of the large pension providers. Stakeholder pensions tend to be very cheap in fees as they are straightforward passive investments. There is no fund manager per se. Your money is simply split into various assets e.g. half into bonds and half into equities. This is why stakeholder pensions are so cheap. My mum has a stakeholder pension that charges roughly 0.3% per annum - an incredibly low amount especially when compared to the charges on actively managed funds. Someone initially tried to encourage her to invest her pension in a fund that charged  3% per annum.

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