What do self employed people do about pensions?! This is something obviously I would rather not think about and pretend that it's never going to happen, but I do feel like I need to start paying into something soon!

With the economy how it is, and with talk of people not getting the money back that they have paid in - what is the best option for self employed musicians?!

Buy property. Let it.

Not an easy option for those on a low income who live in rented bedsits though, T.W. I think that everyone should start a pension plan as soon as they begin work. The younger you are the less it will cost. My advice is to see a pensions advisor and start a plan
now.

This is good advice.
I am a teacher and I pay about 6% of my salary into a pension fund and my employer pays a further 9% or there about in. You might like to think about that as a benchmark figure. These are gross figures. You pay pension contributions net so in practice you should be paying in about 11% of your gross income to meet my benchmark.
However, paying money into ISAs is also worth thinking about because while the tax benefits are not as good you get flexibility with an ISA you don't get with a pension.
I doubt buy to let property is a good investment right now and more importantly it is far from low risk.
Dora

As long as the mortgage is covered by rent, it's not that much of a problem. Surely in the long term, it's very unlikely that there won't be a net gain on the value of the property? I think there may well be another dip in the market on the way so I personally won't be buying anything yet (although I'm buying a home, not an investment).

Getting the capital for the deposit is a different matter, it seems that you need a 20% deposit to get a reasonable rate of interest on the loan these days!

To provide an income when you are no longer working, you have the following main options, listed with some of their pros and cons:

State pension:
Register self-employed and make national insurance contribution. With 33 years-worth of contributions you are entitled to a state pension
It is safe, it is inexpensive, but there might not be much of a state pension by the time you reach the (ever-increasing!) retirement age, currently 65.

Personal Pension plan:
Money invested is pre-tax
Can take 25% tax-free at retirement
The money is safe - your creditors can't touch it
You can't take any of it till you retire(but you can retire early)
You lose (some or all) control of the money depending on the type of pension plan
You cannot pass the fund on to your descendants (unless you die before you draw a pension)

Cash investments earning interest:
Relatively safe, but
Poor real rate of return
May even lose money if inflation is more than the interest
Income is taxed (except in ISAs and similar)

Stocks and shares:
Can make huge returns (and you don't need a fortune to get started)
Can also lose all your money

Property:
Over the long term - likely to be safe.
You either sell and take a profit, or, more tax efficiently, some combination of re-mortgaging to release equity, and renting for income.
Don't forget costs of upkeep, and legal compliance (gas electricity, etc.) for renting
Choose an up and coming area and you can do very well
But for an individual the timing of a property slump can wreck retirement plans

Works of art, antiques etc.
Well chosen - can make a fortune
Can also become worthless
And they can be stolen/damaged/lost ...

Intellectual Property
Write books, write music, make videos, invent things and patent them etc.
they will continue to make money for you when you are no longer working
(or they will take all your time and you'll never make a penny!)

Own company
Create a company, build it up, sell it.
Could make you indpendently wealthy
- or bankrupt and back where you started.


As you see, everything has a cost and a risk. What you choose depends on what you know, your age, your attitude to risk, how much effort you want to put into it. If I knew enough to choose wisely between these options, where to buy property, which stocks and shares to invest in etc., I'd be out there doing it, not advising others!

Accountants and financial advisors can explain things and advise, but the decision is always yours. But they don't care as much about your future as you do!

As for having money to invest, the trick is to imagine that your income is only 90% or 80% or whatever, of what it really is, and invest the difference. Sounds hard, but it can be done.

Thanks for all the comments.

I wish I had enough money to buy a property and let it...but I do not!

Thanks Mad Tom for listing all the options - that's really great.

I already pay my national insurance contributions and would expect to have 33 years by the time I retire, so that's good! I've heard that these days you get about £90 a week on the state pension, I presume this is correct?

I suppose you've just got to decide what sort of a life you want to be living when you retire, and I think to remain living in my mansion in Gerrards Cross (which is currently imaginary) then I may have to start saving myself!

Thanks Dora for your comment - it's good to know what sort of percentage people are paying into a pension and gives me a good idea of what I should be saving!

I think perhaps it's time to see the pension advisor, (orrr write an amazing film score and live off that)

I remember being told that the general rule is that when starting a pension, you should be putting half your age as a percentage of salary into it, so the earlier the better. I'm not sure how true this is these days.

I really don't think pensions are that great value as you could theoretically invest 20K for each 1K a year pension payout, then drop dead the day you hit retirement and not be able to pass it on to your children/spouse/whoever.

You are absolutely depending on the property being let and let for an income which covers the mortgage. The UK is full of unlet property and rents on the let property have fallen. There is the risk.
Plenty of buy to let folk are currently wondering what went wrong.
Dora

Of course the other drawback to letting property is that, even if you get a tenant whose rent covers the mortgage, there may be additional (unpredictable) costs for upkeep of the house. Boiler breaks: a few hundred quid, leak in the roof: few hundred quid. So for anyone wanting to be a landlord/lady (!), quite a bit of spare disposable cash is needed!

Personally, for my long term financial interest, I've started teaching a few lessons at a school, and because the school invoice the parents and I invoice the school, my earnings are pensionable; from what I gather, the Teacher's Pension is quite a good one. I know the return isn't fantastic compared to that of property or stocks and shares, but it is low risk, low maintenance, and my employer makes contributions. I'm also eligible to pay into the same pension for any teaching work I do in any other school. providing I do it as an employee, and not freelance.

When I used to work in a building society, the financial advisors always had to advise customers to make maximum contributions into a work pension before contributing to any other, sheerly because of the employer's contributions.

When the local ditzy hairdresser is harping on about having bought a buy to let place as an investment, you know trouble is around the corner!

Absolutely so.


Plenty of buy to let folk are currently enjoying a very good income from it.

Go and talk to an IFA (independant financial advisor). Most, like music teachers, get new work based on recommendations... so they aren't just out to make money from commision. Expect your first appointment to be free, to include completing a full fact find on your financial situation during it (be honest doing it!) and to involve some discussion of how you are going to pay for their time (fees or commision).

You can get financial advise on pensions etc through your bank, but they'll be only offering products from that particular bank.

There are a vast array of different pension options available now, and it is possible to opt for your pension to be paid to your partner or another beneficiary should you die. I have a vague recollection that contributions to a pension are tax deductable for the self employed in some way, but its a long time since I last researched the area... and I never was a financial advisor, so I'm not really prepared to say any more!

Of course there are. Which rather makes my point. If you want a high return you have to be willing to take some risk. I didn't say you couldn't make money out of it. I just said it wasn't risk free.
Dora



Contributions are paid net of basic rate tax. So if you want to pay, say £80 a month into a pension fund then you do exactly that but the fund is able to recover 20/80ths of your contribution from the taxman on your behalf making it worth £100 (£80 x 100/80) to you. It is a very tax efficient way of saving. This is true for the self employed as well as employees.

It's not really a risk, though, is it? You still have the capital in bricks and mortar.

Until you default on the loan, anyway...



[/rant]

Buying to let is a potential investment option, but I don't like it that way. I'm sick to death of renting through agencies from negligent landlords who just want to take the money without dealing with the commitments they have to their tennants. Everytime something goes wrong (which is regularly, due to lack of maintanance) the tennants household is stuck in chaos, while the agency tries the landlord, who don't want to spend any money, who mulls it over, who fusses about, who doesn't get back to the agency, who doesn't bother to chase them up... and in the meantime the tennant still doesn't have hot water / functional cooker / insert other.

There is a lot more to letting than taking the money each month, and paying off a mortgage.

[/endrant]

I'm using risk in a formal sense. I mean by risk the possibility that your income, and capital gain, is not what you expect it to be. If you depend on the rent in order to pay the mortgage then you have a serious level of risk since you cannot be sure of being able to let the property for the level of rent you anticipate.
I remember watching a tv programme with a woman who spent her divorce settlement on 7 flats in a single block with the help of a substantial mortgage. The value of the property had fallen considerably and she had been unable to le the 7 flats at a rent which was enough to cover the mortgage.
So she couldn't pay the mortgages and if the flats were repossessed it seemed unlikely that the proceeds from the eventual sale of the flats would be enough to clear the mortgage. She expected to lose her family home because the lenders would seize it in order to recover their investment.
So going back to your point you only have the capital in bricks and mortar if you keep up with your mortgage payments.
FWIW I lecture in Finance and Tax.
Dora

Then I'm sure that you'd agree with me that the sensible thing to do would be to look out for 'bargain' properties and in up and coming areas where it's more easy to let them. That minimises the risk and is a no-brainer.

Ask around for a good, independent pensions advisor, but do remember that they, like everyone else have to make a living so do check that you are really comfortable with any advice before parting with any cash now.

I've never had much spare cash around - four musical/sporty kids and no rich relatives have ruled that one out. As a result there has never been much 'left over' to invest for the future. My biggest outlay - by far - has been the house and this is being financed through an offset mortgage where, effectively, I pay to borrow only the difference between the mortgage on the house and my (meagre) savings. As it is nearly always the case that you will pay more interest to borrow money than you can earn on savings, that has to be a good bet. Also, in the unlikely, but not impossible scenario that the bank goes bust, I would like to think that at least my savings were still offsetting the mortagage.

I absolutely agree that some people make a good living from property. I doubt it is a "no-brainer" most of the time. During a bubble of course it is hard not to make money but bubbles do not last forever.
In practice the best strategy is to be well diversified. Buying 7 flats in the same block is not a good example of diversification.
A well diversified portfolio will include cash, bonds, shares and property. It might also include commodities and possibly specialist items such as paintings.
By borrowing money to buy property you become geared and while the expected returns increase so does the risk.
Dora

Hi David. There is the argument that by building up your qualifications and expertise, and also taking steps to build up a practice in a new area, then you are effectively investing in your future in ways that are entirely age appropriate. Even at these tender years though it woudl be worth putting something by in a desciplined way - say if a course of study comes to a close could you continue to invest the amount it was costing you each month? Then set up a direct debit so that you stop thinking of this sum as your disposable income.

It has to be said there are a good number of pretty elderly instrumental teachers still working - and loving it. In some ways I hope I am one of them one day - after all, Dame Fanny does say "you don't stop working because you get old - you get old because you stop working"! Just have to hope it's for that reason and not because they failed to plan for their retirement.

The thing about it is choice, though. I also like to feel I could buy a train ticket to Spain when I'm 60 and give no-one a time to expect me back!

Lets take 25 as the starting point, 65 as the retirement point and 85 as the death point.
So in 40 years you need to save enough to live off for the following 20 years.


There is a bit of an issue with saving a small pension, in that the basic state pension is x, but the minimum income guarantee is y. Where y is quite a bit higher than x (figures will be on hmrc site somewhere).

So if you save a small pension, p such that x+p < y then you might as well have spent the pension money during your working life, as the government will top it up to y anyway. (Assuming that is still the system come your retirement age). In addition someone on only the basic state pension may be entitled to housing benefit as well, which should probably be taken into consideration.

So, unless you can put aside a goodly amount, then there is an argument to eat drink and be merry and then throw yourself in penury at the feet of government and be bailed out.

There re two flaws here.

1. It is only relevant if you plan on you only source of income in retirement being the state (via pension or otherwise) and/or a very small additional pension. I would like to have rather MORE than the minimum income (y) to live on in my old age. So I might as well have the state pension as part of my retirement income, as it is relatively inexpensive to fund, and arrange to have other income for a whole range of sources.

2. The UK government only makes up your income to the guaranteed minimum if you retire in the UK. if you retire in another country. But your pension can be paid wherever you retire (though in many countries you'll forgo the annual increase, so it will dwindle in real value).

That's they advantage of talking to a Financial Advisor (independant, or if you really have to, at your bank). They'll be able to look at your situation and tell you!

Savings accounts aren't generally tax free (excluding ISAs), pensions are associated with extra tax breaks. That's the main incentive to go for a pension fund.

Honestly though, I'm a little alarmed at how financially unsavy so many people are. Okay, so money and markets and risk and products and all that kinda talk can be incredibly confusing and rather scary. But, that doesn't mean it isn't worth doing a bit of reading and going to see a professional for some advice. Surely, that's the obvious way to deal with something that's worrying you? I'm also a little concerned at how blase some people are about their future... but maybe that's because I'm not old enough to have become as cynical.

For ISA's the interest is tax-free - i.e. you don't have to pay tax on any interest you earn. The money you pay into the ISA is after tax, i.e if you take home £1,000 per month after tax and pay £100 into your ISA it will cost you £100.

For pensions the contributions you make are before tax, so if you want to pay a total of £100 into your pension then it only costs you £78 of your take home pay (assuming basic rate tax) with the tax relief making up the extra £22. This is why pensions are a tax efficient way of saving for retirement. Once the £100 has been paid in it will generate "interest" or a return on that investment which will build up in your fund (except recently the return has usually been negative, but over time it should be positive). When you reach retirement and draw down a pension from that fund the pension will become taxable income, subject to all the personal allowances etc in effect at the time.

I wouldn't rely on there being a state pension when I get to retirement age. I have a pension and ISA arranged through a financial advisor but i'd probably be better off stashing money under my mattress as the interest rates are so rubbish at the moment.