Planning your personal pension
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The pressures of running a business can mean owner-managers focus on their firm's short-term requirements and neglect their own long-term financial needs. But it's unwise to rely on the proceeds of your business to provide you with an income for your retirement. Tom Whitney looks at personal pension schemes
According to the Office of National Statistics, less than half the self-employed people in the UK pay into a pension. "Many self-employed people who are earning a lot of money assume they will be well off in retirement, but unless they have a business that they can sell when they stop working, they risk facing poverty in retirement," warns the Pensions Advisory Service's chief executive, Malcolm McLean.
How to plan your pension "Of all your retirement income options, perhaps the simplest is to take out a personal pension," says Evolve Financial Planning director Jason Witcombe. "The amount you will get at retirement depends upon how much money you have paid in, how well it has been invested and the age you retire." Personal pension schemes (PPS) are available from most financial-services providers, such as banks, building societies and insurance companies. Seek advice on which one to choose from your accountant or an independent financial adviser. "With a PPS, you make regular payments into a fund, which is invested on your behalf," explains Witcombe. "The more money you put in, the greater your retirement income, but bear in mind investments can go down as well as up. "Choose a pension fund with a sound track record of investment performance and always take professional advice before committing to a fund," he adds. Tax relief A key advantage of pension contributions is that they qualify for tax relief. Following the simplification of pension taxes in April 2006, you can contribute up to 100 per cent of your earnings to your personal pension scheme and obtain tax relief - provided your contributions do not exceed the 'annual allowance' of £215,000 (for 2006/07). To encourage pension savings, the government offers tax relief at the basic rate of 22 per cent on your pension contributions. This means that for every £78 you pay into your pension, £100 goes into your fund. Currently, you can withdraw 25 per cent of your fund as a tax-free lump sum at the age of 50 and above (increasing to age 55 and above from 2010). The remainder is normally used to purchase an annuity (which is invested to provide you with an annual income for the rest of your life). Keep track of your pension "Don't forget about your pension," advises Witcombe. "As your earnings change you may want to adjust your contributions." You can work out the retirement value of your pension using the free pension calculator at www.pensioncalculator.org.uk. "If it looks like the fund won't meet your needs, you could increase your contributions or consider an additional scheme," adds Witcombe.
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