My Future Fund, the long-awaited auto-enrolment state savings scheme, will extend pension coverage to more than 800,000 additional employees. The self-employed are not included.
They cannot voluntarily sign up and don’t have access to occupational schemes. As ever, for the self-employed, it’s fend for yourself.
The Government’s scheme means that for every €3 an employee puts in, their employer will also put in €3 and the State will top it up by €1.
How are the 350,000 people who are self-employed meant to match that? It’s hard enough to put aside money for income tax, universal social charge and PRSI each month, not least because their earnings may fluctuate.
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If, in retirement, the self-employed are not to diverge even further in terms of financial security from their employee counterparts, they also need to be automatically funding a pension too, in their case typically through a personal retirement savings account (PRSA).
Perhaps the best way for solopreneurs to respond to auto-enrolment is to treat it as a clarion call for sorting their own pension provision.
“The fact is that we are all living longer and the earlier you start the better opportunity you have to have a significant pension fund for when you want to ease off work, take a step back and start living your second life,” says Sinead McEvoy, head of retirement solutions at Standard Life.
“We’re typically living decades into retirement now, so you will need a significant fund.”
Unfortunately, too often the self-employed are so busy running their business that they procrastinate. In the early years in particular they may simply not feel they can afford it.
Then, when they do start to think about it, they feel they’ve left it too late so don’t bother.
It doesn’t help that pensions are boring, at least to the young. The resulting inertia is a fact that auto-enrolment helps to address too.
“I’m in my 40s and when I was younger, if I started talking about pensions, my friends’ eyes would glaze over. They simply couldn’t have been less interested. It’s only now that they are all starting to talk about amounts and benefits and asking me how much they should have and whether they should put some of their bonus in,” says McEvoy.
No matter how late in the day it feels, she advises all self-employed people to start by talking to a financial adviser.. “Just put a plan in place. Obviously the key is to get in early but it’s never too late to start, because something is better than nothing,” she says.
The self-employed are entitled to qualify for the state pension at 66, once they have made enough PRSI contributions over their career, typically via a Class S PRSI contribution paid as part of their tax returns every year.
The only other help they get in funding their PRSA – although, again, PAYE workers get it too – is tax relief on pension contributions. Typically you can contribute between 15 per cent and 40 per cent of your income to a pension, and that income will not be subject to income tax.
The money in your pension fund also grows tax free, unlike the net contributions from your earnings that you might put into investment bonds or shares. “With those you’re going to be taxed on your growth either via capital gains or an exit tax, at 33 per cent or 41 per cent on the growth. There is no tax on growth in pensions while it’s in a pension fund,” McEvoy points out.
If you do build up a pot, on retirement you are, again like those in occupational pension schemes, entitled to take 25 per cent of it in a tax-free lump sum. With the remainder you can buy an annuity, take it in cash subject to income tax, or transfer the balance into an approved retirement fund (ARF).
All of this makes pensions much more attractive for the self-employed person than simply trying to save. It’s why, whenever the self-employed make extra money, their first thought should be to put it into their pension, says McEvoy.
“Over the last number of years, after each budget, at the beginning of January, we’ve all been up around €50 or €100 a month, typically, just based on budget changes alone. It’s so worth putting that money into your pension because you won’t miss what you never had and compounding that over 10, 20 or 30 years is huge,” says McEvoy.
“It’s little steps like that that make a difference. But really, it’s about starting as early as you can and, if you’re self-employed, and you know you’re not going to be part of the auto-enrolment scheme, it’s about knowing you need to be doing something about this too.”
