‘I’m 32 and self-employed – is £50 a month enough for a pension?’
Rob White
7 min read
Oliver Smith owns a flat, has some savings, and premium bonds – all that is missing is a pension - Christopher Pledger
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It’s been a busy few years for 32-year-old Oliver Smith. After leaving school, he honed his carpentry skills before moving to Australia, where he thrived in a building trade that still uses timber frames for houses.
He says: “I started off as a carpenter, self-employed, working domestically – so in people’s homes doing bespoke joinery: wardrobes, alcove units, bookcases. I did a whole range of different things growing up working for different builders.”
Returning home to England just before the pandemic, he had an idea for a business, and he’s now the owner and director of Vertex Garden Rooms, which he formed in 2021.
A garden room is a self-contained unit which people buy for a range of purposes, such as gyms, offices or places to relax. The pandemic turned out to be good for business.
Mr Smith says: “People had lots of spare cash as they weren’t allowed to do anything and were turning their attention to their homes and gardens. Working from home became very popular, so I created and designed these homes.
“It’s all bespoke, nothing is blueprint. I sit down with the client and basically just go through their wish list, working backwards from what they’ll use it for. I come up with a design that gets written up.
“We do the entire project as a full turnkey project from start to finish. We don’t leave it half done – we provide an electrical package, decorating, plastering. The customer gets given the keys and can move in.”
The business has taken off and now makes around £200,000 a year. He’s already built more than 20 garden rooms and employs two full-time subcontracting carpenters, with a third to come.
He owns a flat and has some savings, along with premium bonds. However, one aspect that’s conspicuously missing from his finances is a pension.
He says: “I’ve got a mortgage like everyone. I do tend to save, as I don’t really have time to spend my money. I have money to invest in security for the future.
“My girlfriend [works] full-time and she gets her pension sorted. For people that are self-employed, they have to do it off their own back and we have no clue. When I heard of Scottish Widows, it sounded like it was just for widows.
“I need some information on [pensions] and there’s a lot of information out there. It’s hard to narrow down what you need and what you need to be looking at.”
Along with around £10,000 he has set aside, he’s able to put £200-300 a month into something he can access quickly if he needs it. For money that’s locked away for years, such as a pension, he’s thinking of saving £50 a month. He’d like to know what his savings and pension options are.
He adds: “Having something you can’t get to until you’re very old, you might not live until then. I’d always make sure cash flow is good in the business.”
Robert Cochran, retirement expert at Scottish Widows
Mr Smith finds himself in a similar position to many self-employed people in needing to focus on cash flow and day-to-day money at the expense of long-term planning. An added complexity for him and many of the self-employed is not having the stability of regular income or employer contributions to a pension.
One solution may be to invest the £10,000 he has, alongside the £200 to £300 per month he has available, in an Isa. He can invest up to £20,000 per year, the funds grow free of tax and are accessible as and when he might need them.
In terms of saving into a pension, he thinks he can afford £50 per month to be tied up for retirement. This is not the kind of contribution that would lead to a comfortable retirement, but the important thing is to start the habit of pension savings.
Many Isa providers also offer pension solutions and some banks offer these solutions alongside their bank accounts, making it easy to keep track of your Isa, pension and bank account all in one place.
If he builds up significant funds in an Isa and has more than enough available funds secured, he can choose to pay some of those Isa funds into a pension to benefit from tax relief. He could pay in £8,000 from an Isa and get it made up to at least £10,000 through tax relief.
Lisa Caplan, director of OneStep Financial Planning at Charles Stanley
In terms of retirement, Mr Smith is not unusual for a self-employed person in having no provision. Auto-enrolment has been successful, requiring employers to contribute to employee pensions automatically, but there is no equivalent scheme for the self-employed. However, there is a government incentive for Mr Smith to invest in a pension – tax relief.
It can be helpful to think of a pension as a pot with tax benefits that’s set aside for when you stop working. The money in the pot is yours and should grow over the years without any tax. You also get a pass on income tax for the money you put in.
You cannot take money out of a pension until 10 years before your state pension age. In Mr Smith’s case, this is 68, so he would not be able to access it before he’s 58.
However, if he did set up a pension for himself, he could contribute in two ways:
1. Personal contributions to a self-invested personal pension (Sipp). This is where Mr Smith pays in via his own bank account, not the company’s. The Sipp provider will claim the basic rate relief top up and add it to his contribution. So, a £50 contribution becomes £62.50 in the pension each month. If he’s a higher rate taxpayer, he could reclaim a further £150 back in tax relief via his tax return at the end of the year.
2. Company contributions. As owner and director, he can pay in via the company and if his accountant agrees, it is treated as a normal expense for the company, reducing the amount of corporation tax payable. He also won’t have to pay National Insurance or income tax on it. This is called an employer contribution.
The simplest solution is for Mr Smith to open a Sipp online, which gives him a lot of flexibility. As a company director he can also investigate opening a Small Self-Administered Scheme (SSAS) which has the benefits of a traditional pension, plus the ability to loan funds from the SSAS to his company. He can invest in commercial, but not residential, property through either a Sipp or a SSAS.
He can pay in regular amounts each month or make a bigger contribution when he knows how his year has gone.
In terms of his £10,000, although Mr Smith feels comfortable with property, he should be aware that all his money would be in one investment. This is risky. Any rental income would be taxable, and he would have to pay capital gains tax when he sells the property. Residential property can’t be held in a pension or Isa, so he would not get the substantial tax benefits that come with these.
He could make a one-off contribution to his pension, as long as he’s earned that amount during the tax year. His £10,000 would get him £12,500 invested in his Sipp. If he’s a higher rate taxpayer he would save an additional £2,500 in income tax.
Mr Smith could also consider a Lifetime Isa, which comes with a 25pc top up on his investment. He could invest in investments or cash, but for retirement, investments are usually a better route. He can draw this money out, but if he does so before he’s 60, there’s a 25pc penalty. This means he could be left with less than he contributed. There is also an annual limit of £4,000 a year, so he would have to spread this across multiple tax years.
