There are unprecedented numbers of people taking the self-employed route in the UK. According to data from the Office for National Statistics (ONS), there were over five million self-employed professionals across the UK in Q4 2019. It now represents over 15% of the UK’s entire labour market – up from 12% at the turn of the millennium. It doesn’t matter whether you are starting your own business as a self-employed freelancer or an outright start-up, it’s just as important that fledgling entrepreneurs look to the future as well as the present. The National Employment Savings Trust (Nest), the government-funded pensions provider, revealed that less than a quarter (24%) of self-employed entrepreneurs are actively putting funds aside for the future in a pension pot. There’s no doubt that the peaks and troughs of self-employed income can make it unappealing to stash money away into a pension pot when work dries up, but it’s vital to think about your life after work. Being responsible with your hard-earned money today can reduce your sole dependency on the state pension later in life. If you are starting out and financing a new business in your 30s or 40s, it’s still not too late to think about your long-term savings. The four solutions below can help cement your future in retirement from your business.
Consider your pension fund options
Self-employed pension schemes are left entirely up to the individual to plan for their own future. That’s at odds with PAYE employees, whose companies are legally obliged to enrol staff in an auto-enrolment pension scheme from day one. If you are a small business owner, you have three options when it comes to setting up a new pension fund. First and foremost, you have a basic personal pension, which most investment firms will provide. Secondly, you can open a self-invested personal pension (SIPP) which gives you the flexibility to invest your funds in anything from stocks and hedge fund through to commercial and residential property developments. Finally, you also have the option of entering the Nest scheme, which permits monthly contributions from as low as £10.
Save funds into ISAs
An alternative to saving into a pension fund is to open an Individual Savings Account (ISA). ISAs are considered one of the most tax-friendly savings options for entrepreneurs, given that you can invest up to £20,000 per annum tax free. There is no minimum threshold for investment in ISAs either, which means you can invest anything between a tenner and £20,000. The ISAs we’ve described above are known as stocks and shares ISAs. There are also cash ISAs which will simply grow in line with interest rates and inflation.
Don’t put all your eggs in one basket
The smartest entrepreneurs will diversify their savings across a variety of assets. This helps to protect their wealth in case of business failure. It also means that savers would have to be extremely unlucky to experience all their assets losing their value. Some entrepreneurs also take matters into their own hands and invest some of their income into the forex markets, which see fiat currencies rise and fall based on political and economic climates. Forex investors can also get a help with their initial investment via forex bonuses that maximise trading balances for all newbies. There’s also the burgeoning cryptocurrency sector that’s proving particularly popular as an alternative currency investment instead of forex and commodities like gold and silver.
Think about an exit strategy for your business
If you are setting up in business with the sole intention of selling it to pay for your retirement, you will need to ascertain what’s known as a ‘lifestyle figure’. This is the amount you will need to achieve from the sale to enjoy the lifestyle you desire. Remember that any business sale will be subject to Entrepreneurs’ Relief. This means that you will have to pay a reduced rate of 10% tax on sales up to £1 million in your lifetime. Anything over this amount and you will be subject to pay higher tax rates. Your exit strategy may not revolve around selling the business either. Instead, you might consider an IPO and listing the company on the stock exchange, handing you immediate liquidity.