Much to the ire of many a financial institution, I am self-employed. Those two dirty words which mean it is near impossible to get a mortgage, earn a regular income, and save for retirement. On the upside, I have four private pensions accrued by working for various companies over the past 20 years.
What is she complaining about? you cry. Not one but four private pensions, which will all pay out a hefty retirement income when I reach the new state retirement age of 68.
Wrong. When I started my first proper job with Pearson and I got my first defined contribution (DC) pension at 26 (I sadly just missed final salary by a year, unlike the baby-boomers before me). This DC pension – along with the other three – is linked to the fortunes of the global stock markets.
If the FTSE 100 crashes, for example, so will the value of my pension fund. But if it reaches an all-time high, I benefit. This makes it almost impossible to estimate the value of my pension fund upon retirement – which I put down as 62, as I thought it sounded very old.
I am now quite near this retirement age, and it turns out that 62 is not that old. If I were to rely on the income from my first pension, I would live on the princely sum of £1,750 a year.
The second private pension I have is with Scottish Widows. I seemed to have been slightly confused with my retirement age for this one – maybe I was feeling optimistic that day – and I decided I would retire at 55. I will therefore be taking the lump sum, buying a Maserati and moving to Dubai on a slightly larger income of £3,210 a year.
And so on, and so on. With my third private pension with Royal London, I will retire in 2039 and receive an annual income of £1,780, if I invest in low-risk plan. If I invest in a high-risk one, my retirement income would be slightly higher at £8,570. Don’t spend it all at once!
Faced with this paltry retirement income, and with the government pushing up the state retirement age to 68, what options do others like me have if they are looking for an income in retirement?
As a self-employed person, you do have a few options for giving yourself an income in retirement: relying on the State pension. The government does provide a state pension – currently £122.30 a week – subject to meeting certain qualifying and eligibility conditions.
Alternatively, you could build an ISA portfolio while you’re working and live on that in your old age. Sell your business or buy-to-let property empire and live on the proceeds. Save into a defined contribution pension while you work. This will give you a pension pot that can then give you an income when you retire (see above). The cheapest pension vehicles tend to be stakeholder or personal pensions. But if you want more flexibility in how you invest your pension, you could go for a SIPP (Self Invested Personal Pension). Taking a lump sum.
Taking a lump sum seems to be the most popular choice, by the way. According to the latest figures from the HMRC, withdrawals of pension cash by over 55s is continuing to rise, with 200,000 individuals taking £1.86 billion from their funds between April and June this year, the highest quarterly figure since new pension rules were introduced in 2015.
In its recent Retirement Outcomes Review interim report, the FCA said taking pension money early has become the ‘new norm’ with nearly three-quarters of pots accessed by people under 65, most of whom took lump sums.
If you’re not sure what your next step should be, there are several websites where you can get more information including The Money Advice Service, The Pensions Advisory Service, and HMRC. If these options don’t work you could always try winning the lottery – or if the worst comes to the worst, just carry on working past retirement age.