Smart Money: Never too late to start saving for a comfortable retirement if you're self employed - Jenny Ross

Q This is embarrassing to admit but I don't have much of a pension and am wondering what my options are. I am lucky enough to own my flat outright so I have been working on the assumption that I will downsize when I retire and use the difference as my pension. I am turning 53 this year, and have mostly freelanced or done short contracts throughout my life so I don't have an employer pension. I don’t think I am alone in this mess.

To produce the ‘comfortable’ retirement target of £19,000 a year, individuals relying on income from a defined contribution pension plus the state pension would need a pot of around £192,000. Photo: Dominic Lipinski/PA Wire

A Please don’t feel embarrassed. There are so many financial decisions to make in the here and now that long-term planning can easily take a backseat – you certainly won’t be alone.

You’re right that in some respects, employees starting their career today are at an advantage when it comes to saving for their retirement. While they’re much less likely to benefit from the generous final salary schemes that were commonly offered by employers in the past, most don’t have to make a conscious effort to set money aside for the future.

Thanks to automatic enrolment, the proportion of employees with a workplace pension has risen from 47 per cent, when the rules were introduced in 2012, to 78 per cent in 2020.

But auto-enrolment is no use to self-employed people. Research by the International Longevity Centre UK has found that self-employed Generation X workers like you are five times more likely than other workers to have no pension provision, due to a lack of access to traditional pension schemes. Even those who do have a pension might not be saving enough to guarantee a comfortable retirement. The question is, how much is enough?

To help answer this, Which? has surveyed thousands of retirees about their spending habits. This research suggests that people living alone need an average income of £13,000 a year to cover spending on essentials, such as groceries and bills. The figure rises to £19,000 when including more spending on leisure activities, and up to £31,000 a year after tax to incorporate long-haul holidays and a regular new car. For couples, those figures are £18,000, £26,000 or £41,000.

To produce the ‘comfortable’ retirement target of £19,000 a year, individuals relying on income from a defined contribution pension plus the state pension would need a pot of around £192,000 if they access it using pension drawdown (assuming growth of 3 per cent a year). I appreciate this might seem daunting. There’s no getting away from the fact that the earlier you can start saving for retirement, the better – but it’s never too late.

The reason saving into a pension is such a good idea is that the government boosts your contributions via pension tax relief. This means that money you would have paid in tax on your earnings goes towards your retirement savings instead.

Calculations by NFU Mutual show how you can build up a decent pot even if starting late: assuming annual growth of 4 per cent after fees, a basic-rate taxpayer who saves £200 a month (£250 after tax relief) into their pension from the age of 55 would have a pot worth nearly £37,000 by the time they reach 65. If they invest £400 a month (£500 after tax relief) their pot would be over £73,000.

There are many personal pensions to choose from. These are just like workplace defined contribution schemes where money you pay in is invested in a choice of pension funds – except you set it up yourself, rather than via an employer. Make sure you’re happy with the level of risk you’re taking and the charges you’ll have to pay, and check if there’s a minimum payment.

More confident investors have the option of a self-invested personal pension (Sipp), which gives you more control over how your money is invested. There’s also a newer breed of Sipp that caters for less confident investors by allowing you to pick from a limited range of ready-made portfolios. Fund selections are based on your answers to a questionnaire about your investing objectives and appetite for risk.

I’d encourage you to think about speaking to an independent financial adviser (IFA) to help you better understand your options and maximise your retirement income. If cost is a barrier, bear in mind you can also get free impartial guidance from Pension Wise, a government-backed service available to over-50s.

Jenny Ross is the editor of Which? Money