As a working parent you will have been so distracted by raising a family and focusing on your employer or clients that you may have neglected your own needs.
Time out of the workplace to raise a family could have an impact on your entitlement to a full state pension, but it needn’t be a worry if you take some action in time.
It’s never too late to start paying into a pension but the earlier you start saving into a pension the higher that income will be and while for many working mums retiring is a long way off, by the time you reach 40 you will only have 240 ‘pay days’ left before reaching 60.
Angela James, Associate Director at Contractor Wealth, which specialises in financial planning for freelancers, contractors and the self-employed, explains the importance of saving into a pension now to increase your chances of retiring comfortably…..
With constant change and review of the tax relief system it is important to ensure that you don’t procrastinate as valuable time, growth and tax relief can be lost.
Saving for tomorrow
You can invest money personally from your own funds into a pension, or if you are a business owner, freelancer or contractor you can invest directly from a limited company. Pensions can provide substantial tax breaks:
Self employed: you can contribute up to £40,000 in a pension via personal contributions. You claim back the income tax that you would otherwise pay on these contributions, either as the investments are made or when you submit your self-assessment tax return
Employed: you may be able to convince your employer to contribute to a scheme or be ‘auto-enrolled’ into a pension however you can make up for lost time via a personal top up contribution. The amount of tax relief you could receive via ‘salary sacrifice/exchange’ could be even higher than a self-employed person as your contribution can avoid not only income tax but also be boosted by a saving in employees national insurance (NI) too.
Small business owner/freelancer: entrepreneurs face an even greater pension challenge as not only will the kids have come first but you will have focused on building a stable, profitable business and so will often be looking at your retirement needs later. Pension contributions are an allowable expense for corporation tax when made directly from your business so help to reduce your tax bill.
The 2014 Budget brought significant change
In his 2014 Budget, George Osborne made some significant changes to pension legislation that now allows hard working mums more say over how they take their pension benefits.
For too long women were put off saving into a pension because of what were viewed as overly restrictive rules on accessing their money on retirement.
In a single afternoon the old straight jacket that used to apply to drawing benefits was removed by Osborne. Women who were put off investing because of poor annuity rates, which were especially poor for women, now no longer have to annuitise.
Mothers who were concerned that death, early in retirement, would mean that their pension fund fell into the hands of an insurance company, rather than passing to their spouse and children, will be reassured to know that they can avoid having to buy a rigid annuity income and can keep access to their pension pot. The potential for estate planning and the fact that hard working mums can pass their pension down through the generations is hugely refreshing. People who wanted to retain a greater degree of investment flexibility beyond 75 have been helped by George Osborne.
Now, anyone over 55 who has contributed to a pension scheme can take the pot they have grown as a lump sum, subject to tax, to invest or spend as they wish. Women can also buy an annuity and can take 25 per cent of the fund as tax free cash and still be able to transfer the balance to a personal pension ‘drawdown’ arrangement or en-cash their pension. The old 55 per cent tax charge can be avoided as you will be charged tax at your highest marginal rate instead, saving higher rate tax payers 15 per cent tax.
There are generous tax breaks available to help boost your pension so whether you are in your 30s, 40s or 50s, a small amount invested early enough can grow with time. Today, many people are working for longer so there is a lot more flexibility on when and how you draw from your pension. Whichever way you look at it, it’s vital to take action and sort out your pension so that you can grow old comfortably and treat your grandchildren!
About the author
Angela James is Associate Director at Contractor Wealth, which specialises in pension, insurance and investment solutions tailored to the unique needs of freelancers and contractors.