Contractors expert Tony Harris gives some advice on pensions for working mums.
By saving into a pension you can boost your chances of sustaining your current lifestyle into retirement and with ever-increasing life expectancy but potentially unreliable state provision, it has never been more important for women to invest.
Whilst to many, retirement will still seem a long way off, by the time we get to 40 we will only have 240 ‘pay days’ left before we reach 60 and a cruel reality of what is known in investment circles as ‘compound growth’ means that the earlier we start saving, the higher our pension income is likely to be.
Stuff for the kids now versus long term savings
Many women will qualify for relatively low state pension entitlements, but then also fail to build decent private or employee provision too. All too often, as a working parent you may have been so focussed on raising a family and the demands of your employer or clients that you may have forgotten to think of number one.
If you are starting to worry that your current plans may not stand up to the rigours of retirement then don’t panic as it is never too late to start investing.
Save tax today and invest for tomorrow
When it comes to organising a pension you can invest money personally from your own funds, or if you are a small business owner, freelancer or contractor you can also invest directly from a limited company. Pensions represent one of the few remaining substantial tax breaks and next we look at the various options available depending on how you work:
Self Employed – If you are self-employed then you can still contribute up to £50,000 in a pension this tax year 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 and as such can benefit from up to 45% income tax relief on your pension investment.
Employed – If you are employed you may be able to convince your work to contribute to a scheme or be ‘auto-enrolled’ into a pension however there’s nothing stopping you also making up for lost time via a personal top up contribution. The amount of tax relief you could receive via what’s known as ‘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. Good employers will also top up this personal tax and NI saving with the employers national insurance that they will save on your reduced salary and in certain circumstances the equivalent tax relief can be almost two pounds for every one that you give up in take home pay.
Small business owner/Freelancer – entrepreneurs in particular face an even greater pension challenge as not only will the kids have come first, of course, but then you will also have focussed on building a stable, profitable business and so will often come to looking at your retirement needs even later in the day. Pension contributions are an allowable expense for corporation tax when made directly from your business so a hefty tax bill on a business could be reduced significantly.
The Budget could fail women investors
Sadly, up and coming changes to HMRC rules will mean that entrepreneurs, along with women returning to work and starting a pension late, will find it more difficult to accumulate a large enough pot for a comfortable retirement.
The annual allowance you can invest is changing in the new tax year, dropping from £50,000 to £40,000. This will limit the scope for older working women, in particular, who may be playing pensions catch up.
In addition, the lifetime pensions allowance is also changing from £1.5 million to £1.25 million. We are hoping that the Chancellor doesn’t make any further changes to the annual or lifetime pension allowances in today's Budget.
Any changes could be hugely detrimental, particularly for small business owners who haven’t had the luxury of a cosy public sector pension or large company schemes. These hard-working mums will be working flat out to build up a nest egg and any further restrictions on annual or lifetime allowance could severely limit their ability to bridge that gap.
Whether you are in your 30s, 40s or 50s, women cannot afford to ignore the generous tax breaks that are on offer to help boost your pension. Even a relatively small amount invested early enough can grow handsomely and with far greater flexibility as to when to now stop your working life and the way that you draw benefits from your pension, there’s no time like the present to get started on the path to a comfortable retirement.
*Tony Harris has been an IFA for over 18 years and set up ContractorFinancials in 2002 after recognising a need for specialist financial advice for contractors. The company has grown to be the leader in its field with over 10,000 clients and prides itself on retaining a highly personalised service offering jargon free and timely mortgage, pension, insurance and investment solutions tailored to the unique needs of contractors and freelancers.