Being your own boss comes with many perks – but they may have little significance if you fail to save for your own retirement and find yourself struggling financially in later life.

The Government’s automatic enrolment scheme has nudged many employed people who were not saving for retirement in the right direction. However, the self-employed are effectively excluded.

Responsibility for pension provision lies solely with self-employed workers who it seems are seriously lacking in pension provision.

Research[1] shows that there are around 4.3 million self-employed people in the UK missing out on an estimated 4 billion in employer pension contributions a year.

This estimate is based on what self-employed people would probably receive from an employer if they were in employment, rather than working for themselves, and assumes they are missing out on employer contributions worth 3% (the auto-enrolment minimum) of gross salary. However in reality, many employers pay in more than this on behalf of staff.

The study claimed that four in five self-employed people are not putting any money in a pension at all.

Having a decent pension will give you choices when the time comes that you want to give up working. Even if you wish to continue working part-time you will need something to plug the gap, so you’ll need another source of income – and that is where a pension can come in.

The self-employed are entitled to all the same tax reliefs on pension contributions as employed people. The tax relief foregone by the self-employed[2] is estimated to be around 1 billion a year, according to estimates[3].

As a reminder, you get a tax top-up when you contribute to your retirement savings, at the rate of 20%, 40% or 45%. That means if a basic-rate taxpayer pays in  800, it will automatically turn into 1,000. It’s even more tax-efficient for higher-rate taxpayers who can claim back an additional  200 through a self-assessment form. It means your money can grow tax-free for decades.

Once you’ve got your pension set up you can choose to pay in regular amounts or a lump sum when you can afford it. As with any kind of pension, you cannot exceed the official annual limit of 40,000.

If you do exceed that limit, you won’t get tax relief on further pension savings. You can usually carry forward unused annual allowance from the previous three years, so there’s much tax to be saved if you’re not already contributing.

Problems with self-employed people and pensions also lie with those who had been paying into a pension but stopped last year when the pandemic impacted their earnings. One in ten people with a pension had stopped paying into it or had reduced the amount they pay during 2020[4].

Stopping contributions will have a detrimental impact on retirement income in years to come if you don’t restart contributions for a long time. So it’s important to resume as soon as possible.

For those yet to set up a private pension scheme, getting started can be the hardest part. Yet with the help of an adviser to do the legwork on your behalf, you can get saving in a pension with the knowledge you are using your earnings in a seriously tax efficient manner.

Source:

[1] https://www.ii.co.uk/analysis-commentary/self-employed-missing-out-ps4-billion-pension-contributions-ii515636

[2] Based on pension participation rates among the self-employed rose to 18% equating to 3.5m people (https://www.gov.uk/government/statistics/family-resources-survey-financial-year-2019-to-2020)

[3] https://www.ii.co.uk/analysis-commentary/self-employed-missing-out-ps4-billion-pension-contributions-ii515636 

[4] https://adviser.scottishwidows.co.uk/assets/literature/docs/sw-covid-19-release.pdf

Don’t underestimate the importance of estate planning – and making a Will.

The idea of having to pay inheritance tax (IHT) is unpopular to say the least. This tax is charged on an estate, which is the property, money and possessions left behind to loved ones who will pay 40% tax on anything above the threshold.

HM Revenue & Customs (HMRC)[1], recently released figures which showed families paid £5.4billion in IHT bills during the 2020 to 2021 tax year – an increase of £190million on the 2019 to 2020 tax year. You can leave up to the £325,000 threshold – £650,000 if you’re married or in a civil partnership – before loved ones face a tax bill.

However, the Chancellor, Rishi Sunak, announced in the Budget in March that the threshold would stay frozen for five years to help “strengthen” the public finances. It has already been at this level since 2009.

If you plan to leave your house as part of your estate to your children or grandchildren, your threshold could increase to £500,000 per person.

It may seem like a high threshold to reach, but rising house prices over the past few decades have brought more people into the IHT net.

The good news is that there are plenty of measures individuals can take to reduce the amount that HMRC can claim when it eventually comes to assessing IHT. The bad news is that the majority of people are failing to take advantage of such measures.

A study revealed that 78% of people have no estate planning strategy in place, while 66% rarely or never discuss inheritance with their children. The Family and Finances report[2], by Schroders Personal Wealth, shows that most over 60s plan to pass on their wealth to their children after death (72%), with just 13% saying they would do so during their lifetime.

So what are these measures?

One simple way to minimise paying IHT is to shrink the value of your estate while you’re still around. Giving away assets during your lifetime not only reduces your estate for inheritance tax purposes, it provides a much-needed boost to grown-up children moving up the property ladder or even to grandchildren saving for their first home.

The ‘annual exemption’ allows individuals to give financial gifts, tax-free, to the value of £3,000.  You could decide to pay the £3,000 into a Junior ISA for grandchildren each year, from birth if you wish. This money could go a long way to helping the mounting challenge young people face paying for tuition fees or getting on to the housing ladder.

You can even carry over an annual exemption from the previous tax year into the next tax year. You can also give £250 to any number of people every year, but you can’t combine it with your annual £3,000 exemption.

You can also give away all types of assets, including cash, property and shares tax-free, as long as you live for seven years after making the gift. Known as a “Potentially Exempt Transfer”, it must be an outright gift from which you can no longer benefit.

There is a way of giving away unlimited cash without using the seven-year rule – as long as it’s from surplus income and doesn’t reduce your standard of living or force you to dip into your capital to cover day-to-day costs.

You might also consider setting up a trust. There are a number of trusts that mitigate inheritance tax. They are useful for setting aside a sum of money to be used at a later stage, perhaps where grandchildren are still young. Specialist advice is crucial to ensure the right trust is chosen for your particular needs and goals.

Making a Will is another vital part of estate planning. It ensures your financial plans are signed and sealed. Updating your Will is just as important as making one, as circumstances change as life goes on. You can include a Will trust which allows you to make provisos on any assets left to heirs.

There are lots of other measures to consider including leaving your pension untouched to be passed on tax-free.

Gifting substantial sums of capital may not be suitable, for all, particularly if there is uncertainty about how much income or capital may be needed in their lifetime.

A financial adviser can help with this and all things surrounding estate planning, as well as making a Will.

Working with an adviser you can put in place everything you need to bring peace of mind that things are in place to ensure as much of your hard-earned wealth goes to loved ones, rather than to HM Revenue & Customs.

You’re never too young to start planning for the future – and that of your loved ones.

Source:

[1] https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk/hmrc-tax-receipts-and-national-insurance-contributions-for-the-uk-new-annual-bulletin#inheritance-tax-receipts

[2] https://www.spw.com/campaign/family-and-finances