I have been self-employed for nearly 4 years and I stopped putting money into my pension, yes, four years ago when I left the employed world. One of my new year goals is to fix this and restart my pension contributions again. Mark this day in history, 18th January 2019, I have made my first payment into my Pension. This is exciting!
It is something that I often give some thought to. When will I retire, how much money will I have when I retire? Looking at my pension balance now, nowhere near enough. Turning 40 changed my thought process as well. Reaching that age made me think more of the future, suddenly retirement didn’t feel too far away. I needed to get to a point where I was putting money into my pension again.
The thing is when you are self employed your income can be variable, up one month then down the next. This breeds a feeling of insecurity about income and thus a fear of locking it away for a long period of time.
But then at a point in time, maybe two to three years after turning self employed income does become more consistent. You can start to look forward and put money aside for the future. I have reached that point now and am looking forward to building up my pension pot.
But how much do you put aside?
I have been toying with a few ideas on pensions contributions, take a read and see what you think.
A simple regular same amount every month
I could set up a plain and simple direct debit for an amount to go into my pension pot. I have a pension fund with PensionBee which is a consolidation of old employment pensions. But if you are starting from nothing you can also set up an account with PensionBee. I can then add to this whenever I choose. Once I transfer the money into my pension, as a basic rate taxpayer I get a 25% tax top up, meaning HMRC adds £25 for every £100 paid into your pension. You can also use it to reduce your tax liability, if your business is set up as a limited company.
Okay this is a simple method that I could set up and then just leave but I am not comfortable with putting the same amount into my pension every month no matter what I earn. As I mentioned some months are more lucrative than others.
Looking at your earnings every month or week and putting a % into your pension
My income comes from so many different places and in big and small chunks. There might be a £2000 invoice or a £100 invoice. Every week add up all the money received and then move money into pots for either spending, saving, repayment of debt, investments and pension. Set the % for the pension amount at whatever you are comfortable with.
To get an idea of how much your pension could be worth depending on your contributions go check out this very simple calculator from PensionBee. Its super easy to use where you can toggle different elements to assess the impact on your pension. I find it reassuring. and recently used it to see what the impact would be on my pension pot if I paid in on average £300 each month or £500.
I have set my current age and retirement age at 41 and 60. My current pension pot at around 48k. My proposed monthly contribution of £300. I can see that my pension (including state pension) would be worth £18k per year. If I move the monthly contribution up to £500 the pension would be worth £22k per year. It is really interesting to move the toggles to understand the impact of changing monthly contributions, or retirement age. I urge you to take a look.
I could set 10% of my weekly turnover to go into my Pension pot. So, I might have a good week with say £2000 received in cash, £200 goes to my pension pot. Or I might have a not so great week of £500 received in cash, just the £50 will go into my pension pot.
This process can be done monthly as well but I like the idea of calculating it weekly to assess what money can go into all my pots. The goals function in my Starling Bank app can be used to move money from my main balance into the various goals I have set up. Then each month, I move the money off to places like my pension account, my investments account, my current account for the monthly bills etc.
Put money into your pension when a big invoice is paid
I have already mentioned that my earnings can be variable so what about putting money into the pension every time a large invoice is paid. This takes the pressure off in a week where not much has come in, or just smaller invoices have been paid.
Maybe every time I receive an invoice that is £500 or more it triggers a payment into my Pension pot. If I say that amount is 10% again, a £500 invoice means £50 goes into my pension pot or a £2000 invoice means £200 goes into my pension pot. This method might make you feel more comfortable with your pension contribution as its only paid when you are feeling flush with new big invoice money.
My preferred method is the second method
I have already implemented this method for the start of 2019. I have worked out a split of my income and am comfortable with putting 10% of my weekly earnings into my pension. A spreadsheet has been set up to track what money goes where every week. I am excited about finally sorting out something that has been playing on my mind for the past four years.
Stay tuned, as I will be reporting back as to how well this goes and how I feel at the end of the month transferring money into a pot that cannot be touched for at least another 13 years…eekkkk.
Please be aware that any form of investment can go up and down. You may want to consider advice from a qualified IFA. Just make sure they come recommended by a trusted friend and check their investment levels. Some will only work with clients with an investment level of at least £150k. This post was written in collaboration with PensionBee.