If you are employed in somebody else’s business then they are very likely obliged to offer you an auto-enrolment workplace pension. You should almost certainly take advantage of the offer. If you don’t, it’s like turning down a pay rise. But what if you’re self-employed or have your own company?
I took a break from financial services from 1989 to 1991 to run the fitting operations for, a Leeds furniture firm which specialised in high-cost luxury bedrooms. All our fitters were self-employed. One day one of my fitters, Paul, asked about my previous occupation as an IFA. We got around to talking about pensions. As we chatted, Paul said he knew he should have a pension but couldn’t afford one. He was around my own age at the time, mid-twenties. It was common knowledge that all the fitters did work on the side, ‘privateers’ as they were known. I asked him how much his average ‘privateer’ earned him and how many he did every month. Answer: four a month – one a week – and around £300 a time. I asked, “So, Paul, if you charged £320, would you still get the work?” “Oh yes definitely”, he answered, “I know I do it too cheap.” Me: “So Paul, charge £320 and put the extra £80pm into a pension. The government will top it up to £100 and you’ve got yourself started on pension savings for your retirement.” “And if you know you’re doing it too cheap, put your prices up!” I recommended Paul talk to a good adviser I knew and trusted. I lost touch with Paul when I returned to work in financial services in 1991, but a few years ago he phoned me after hearing me on BBC Radio Leeds. He now has a thriving business which employs his two sons and a pension pot well into six figures which will enable him to retire early as he wishes. Remembering my advice, he got his sons started early on their pension savings as soon as they joined his business.
Pension investment provides an immediate benefit via tax relief. A basic rate taxpayer effectively gets 25% immediate risk-free guaranteed growth when he puts in £80 and tax relief ‘grows’ it immediately to £100. If you are in business on your own account, you can use your pension to own your business premises and even as a source of business finance to lend money to your business. Think of it this way: You pay for the pension fund of every business and all their employees from whom you buy any goods or services. If you drink beer you are helping pay toward the pensions of the brewer’s management and workers. If you shop at Asda or any other supermarket, you’re helping pay for their pension scheme. So why aren’t your customers helping to pay for yours?