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 Strachan Studio Ltd, a Leeds furniture firm which specialised in high-cost luxury bedrooms. We fitted rooms for a lot of rich and famous people, Premiership footballers, Coronation Street cast members, the late Lord Lichfield, even Margaret Thatcher. One day I was chatting with one of my fitters, Brian, about my previous occupation as an Independent Financial Adviser. We got around to talking about pensions. As we chatted, Brian, said he knew he should have a pension but couldn’t afford one. He was around my own age at the time, late 20s. It was common knowledge that all the fitters did jobs on the side – ‘extras’ as they were known. I asked him how much his average ‘extra’ earned him and how many he did every month. Answer: four a month – one a week – and £300 a time. Next, I asked him, “If you charged £320, would you still get the work?” “Oh yes definitely”, he answered, “I know I do it too cheap.” Me: “So Brian, 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.” I recommended one of the few good advisers I knew and trusted and sent Brian to him.
I lost touch with Brian when I left Strachan and returned to work in financial services, but a few years ago he phoned me after hearing me on BBC Radio Leeds. Brian now has a thriving business and a pension pot well into six figures which will enable him to retire early as he wishes.
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’re 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 Sainsbury’s or any other supermarket, you’re helping pay for their pension scheme. So why aren’t your customers helping pay for yours?
If a business does not reinvest a certain amount in the business then its profits will be higher in the short term to medium term because capex will depreciate off the books completely and new money won’t be spent, but in the long-term profitability and even the business itself will be endangered. If a restaurateur doesn’t keep the food good, the venue looking good and the staff well trained, sooner or later his customers will eat someplace else. As well-run businesses invest in their future, individuals need to do the same. Every human can think of himself or herself in business as an asset which, like it or not, is depreciating with every day you grow older. Why? Because every day is a day nearer the time when you won’t be working and earning any more. To offset that depreciation, you need to invest in a pension so that when you can’t or don’t want to have to go out to work to earn yourself an income, your pension can provide you with one. Money reinvested in the asset of a pension offsets the depreciating asset which is an ageing worker.