The following is a transcript of our monthly podcast, The Pension Confident Podcast. Listen to Episode 2, or scroll on to read the conversation.
Music kicks in
PETER: Hello and welcome to the second episode of PensionBee’s Pension Confident Podcast. I’m Peter Komolafe, and every month I’ll be talking to members of the PensionBee team and some of the best brains in personal finance to discuss the biggest topics impacting your pension. Quick disclaimer at the top! Anything discussed on this podcast should not be regarded as financial advice. As always with investments, your capital is at risk. Thank you to everyone who downloaded episode one, I’d like to give a particular high five to those listeners who gave us a five-star rating. We love receiving your feedback so please keep it coming. And a shameless plug, if you haven’t already, make sure that you subscribe to us on your favourite podcast app.
Right now onwards to this month’s episode, in which we’re going to be discussing self-employment. Now, last year I took the plunge and decided to go self-employed myself and it turns out I’m in really good company. The number of self-employed have begun to increase again after a period of decline during the pandemic with over 4.1 million people now working for themselves, according to government data. As someone that’s newly self-employed, I can fully appreciate what a minefield it can be. So, if you are also self-employed, or you’re toying around with the idea, then stick with me as we explore the things that you need to know when it comes to your pensions, and how to max out your pension savings. Coming up, we’re going to be joined by Martin Parzonka onto the podcast. He is the Head of Product at PensionBee. He is going to be tackling the technical side of self-employment and pensions, whilst doing what he does best, making things really simple.
Self-employed population within the pension landscape
PETER: But first, I’m joined by Emma Jones MBE, founder of Enterprise Nation. She has been helping the self-employed navigate their new careers over the last 15 years and between 2016 and 2019, she served as a Small Business Representative for the Crown. Emma, welcome to the podcast. Could you please introduce yourself to everyone?
EMMA: Sure. Thanks very much, Peter. And sadly, the Crown was not the film version. You made it sound very glamorous then, but also made me sound a little bit old, but I’ve been doing this 15 years. But anyway, here we are. So yeah, lovely to be here. As you say, my name is Emma. I run a business called Enterprise Nation. And indeed, for over a decade, we have been doing a single thing, which is to help people start and grow their own small business. We’re very busy at the moment because lots of people are doing that. And of course, lots of people have struggled over the past couple of years. But incredibly, lots of people are starting new businesses. So, there’s never a dull day in the world of Enterprise Nation because as I say, you’ve got people growing, you’ve got people scaling back, you’ve got people starting up. But yeah, we exist to connect those business owners to the right support at the right time.
PETER: I agree that there needs to be a little bit more support for new businesses. There are some stats at the moment, which are quite staggering, that suggest a fifth of businesses fail within their first year, and almost 70% of them don’t actually make it to that 10-year mark. And me being self-employed, I’ve recently taken the jump so I understand the dynamics of running a business, needing obviously to make enough money to come into the business before you can start paying into a pension. But for those people who may be looking at what they’re doing at the moment, and they’ve been through the pandemic, and they’re thinking about perhaps starting a business and taking that jump, what advice would you have for them?
EMMA: Yeah, well, the first thing is just relating to those stats, which we often hear actually, is businesses fail within their first three years. But one of the things that we’ve seen at Enterprise Nation is actually, if you go back to a founder who maybe didn’t make it first time round, what you see is that they’ve then learned from that experience and started another business. So, entrepreneurship is alive and well in that respect. But in terms of businesses starting up, first thing is there’s so much support available for them. So, support comes from central government, from local councils, we’ve got big corporates who are offering lots of free training. So, there’s never been so much support for start-ups. Key ingredients to get it right, have a good idea. Having a business plan is a good call. It acts like a route map for your business that kind of says, “I’m here now, this is where I want to get to, here are the steps I need to take along the way”. Making sure you’ve got some decent funding to get started out can help. Lots of sources of funding for start-ups in the UK, like start-up loans, friends and family, of course, still very popular. Crowdfunding has become incredibly popular. So, make sure you’ve got a good idea, good plan, you know financially what you’re going to make from it. But I think the most critical thing that start-ups and small businesses need is a circle of support. So, make sure you do find fellow founders, get support from trusted advisors and essentially, they’re the key ingredients that you need to keep going and keep getting stronger.
PETER: Now, research shows that there is about a quarter, less than a quarter of self-employed people who are actively saving into a pension currently, and I’d love to get your handle on why that figure is currently so low. But more importantly, when you started your business, how long it took you to get round to thinking about a pension and what some of the deciding factors that drove you to take action were?
EMMA: Well, this is the irony Peter and me being on the PensionBee podcast, is that it took me a long time to come around to see the benefits of pensions. So, the interesting dynamic you have in people starting businesses is, many people who start businesses feel that the business will be their pension, and therefore they feel they don’t need to make any provision because the business will take care of them. And indeed, that was my situation. So, I started Enterprise Nation, I thought, “I don’t need a pension, I’m going to keep working at this business until I’m 85. This business is going to sort me out”. And actually, for me, it was auto-enrolment, that forced me into saving. So, everything in terms of the government influencing people to pay into pensions through auto-enrolment has absolutely taken place. So, I think sometimes you have to be nudged into action. You have to look at what your other fellow founders are doing to try and get experiences, you have to hear from trusted advisors as to what you should be doing. But I think to get the behavioural change that we need in entrepreneurs, you have to try and almost distinguish the entrepreneur from the business and say to the entrepreneur, “The business is a separate entity, you have started, and you’re growing this great business, but you also have to make provisions for yourself as an individual”. And I think when founders think of it in that way, that’s when pensions become much more attractive
PETER: With the businesses that you work with at the moment, how many of them do you find have pensions on their mind? Are they actively thinking about it? Or is it very much kind of like an afterthought?
EMMA: It is an afterthought and again, I feel really bad saying this on the PensionBee podcast, because I know, I can feel people behind my head kind of being like, “No, of course, you should say small businesses are thinking about pensions”. But anyone who’s listening who runs a small business or self-employed, will know that there’s many, many other things that small business owners think about. They’ve got to get their product right, they have got to make their sales. We’ve talked about that before, maybe they’re going to hire people, maybe they’re exporting, and export has just changed. Business owners wake up and every day, they’ve got 15 + things that they need to think about and so it’s tough to get pensions as a priority on that when business owners are very much for the here and now. And we look at the kind of past two years and actually, this could be an influence on pension behaviour because one of the things that we have seen throughout the pandemic is just this incredible, first of all, ability of small business owners to move so quick.
So back to this kind of they wake up in the morning, they think about immediacy, they’re like, “What am I doing today?” Not necessarily what is long term planning. However, one thing that has happened over the past couple of years is businesses that have come out of this, have definitely reassessed their financial position because the thing that spooked a lot of business owners when going into the pandemic was, did they have enough of a financial cushion in their current business bank account to keep the business going? That forces many business owners to think “Well, actually, if I’m thinking about that for my business, shouldn’t I be thinking the same for my personal position?” So, the one thing that you could say, and again, looking always for the bright lights of what has come out from the past couple of years, we’re definitely seeing business owners take a longer term view, to make sure that they feel more financially secure. So, they’re more on top of their books in terms of their business accounting and I think we will see that filter across to their own personal position because everybody’s re-evaluating their life. They’re thinking, “Crikey, life is short. I need to live well”.
And really interestingly, from a pension perspective, I think one of the things that we’re seeing in terms of people start businesses is, lots of people who are at the age of 50 + who are starting a business and dare I say, they’re using their pension. So, they’re taking their pensions out early to use that start-up funding. So, across the board, what you’re seeing is this kind of re-evaluation of what we all stand for, what we all want to do in life and hopefully, for business owners, that means looking at the financial future and thinking about pensions. But as I say, maybe for some others, it’s like, “Actually, how can I use that pension to create the life that I want for myself?”
PETER: For new businesses, Emma, who may be listening to this thinking, “Okay, maybe I do need to have a look at sort of setting up some kind of pension arrangement for myself”, where would you say is the best place for them to start?
EMMA: Well, I think one thing, maybe as a start for small businesses, which can get overlooked actually, is just to keep money aside in your bank account. So, one of the things - small businesses tend to bring in cash, and therefore they think all of that cash is ready to spend. But of course, if you’ve got tax bills coming up, or you want investments to make, maybe set up a separate account where you’re putting money aside, so you feel that that’s a saving.
PETER: And so, this leads us on to our last question for you. And in each episode, we ask our guests to give our listeners maybe their top three pension savings tips.
EMMA: Top three tips. I think my first one would be don’t follow my lead, in terms of, I feel like a late converter to pensions. No, I think the first one, and it’s something I’ve said throughout the conversation, actually, and therefore, it just shows the flavour of, as I say, the advice we give is: be making sales because that brings in money to the business that can then go into a pension. You can’t be saving if that money isn’t coming in, in the first place.
Secondly, just consider saving for a pension. And I think connected to that, it would be around this concept of get advice on how to do it. And I think small business owners, maybe if they have an accountant, if they have a bookkeeper, it’s through that source that they’d be getting that expertise and advice to say, “Actually, maybe you should be putting some money aside“.
And then I guess the third thing is just consider those future options and be predicting: How do I want this business to grow? What do I want my own financial freedom to look like? And I know this can be tough when business owners are very much in the day to day. But as I say, one thing that the pandemic has almost forced business owners to do is look further term. And there’s no bad thing for business owners to do what I call “Work on the business, not in the business”. Literally just to head out one day, find a big view, pen out your next three years in business. Pen out your next three years in your personal life. And I think maybe if we all do that slightly longer-term planning, we’ll hopefully realise all the things that we want, and indeed have the money to do it if we’ve got a great pension.
PETER: You know what? I’m a particular fan of that last point that you made. That long term thinking, because it gives you purpose and allows you to build the road to actually get there. I almost call it like time travelling. You’re able to see what the next step is without actually seeing what the next step is. Okay, so thank you so much, Emma for coming onto the show. It’s been really, really nice to have this conversation, almost like this refresher, being self-employed now. If you’re listening to this, and you want to learn more about Enterprise Nation, and what they’re doing to support small businesses there, please make sure you head over to enterprisenation.com.
Expert advice on keeping your self-employed pension on track
PETER: Now we’re at that part of the show where we’ll be going to sit down with a PensionBee expert to do a slight deep dive and answer some of your specific questions on pensions. And for this, I’m joined by Martin Parzonka. He is Head of Product at PensionBee. Martin actually led the development of PensionBee’s self-employed pension last year, so there is no-one better to put these questions to. Welcome, Martin, to this episode.
MARTIN: Hi Pete, good to be on the podcast with you.
PETER: Thank you for being here. Can you introduce yourself for the listeners, please?
MARTIN: So, my role at PensionBee is in the product team. I’ve been at PensionBee for nearly five years and what that role means in product is to listen to our customers and what the market is doing and to ensure that our product is developed with the best interests of our customers at heart. So PensionBee started as a service to allow consumers to consolidate existing pension pots into one new online plan. Clear fee, range of investment options to make pension simple. And then we realised that self-employed people were underserved in this market. And so, we decided that, let’s make it simple for them and allow a journey where they can sign up, not have to add an existing pension, and then have a pension pot for themselves, which they can contribute to, as and when they need.
PETER: Now the key to any happy retirement is what you put into your pension. But as Emma touched on earlier, the self-employed have a lot of costs competing for their attention. And this can have repercussions on the amount they can contribute. A big concern is that traditionally, pensions demand a set contribution every month. And this doesn’t always fit with the realities of self-employment. What’s the answer to this conundrum Martin?
MARTIN: Certainly. So, we’re very sensitive to the needs and flexibility that we can give to our customers. And it’s certainly true that certain legacy pension providers may have required a monthly contribution, and many still do. Companies like us, like PensionBee, and some others will offer flexible options. And so, we enable people to make regular contributions, but for as little as they want. So, if all someone can afford is say £2 a month, then they can set up a contribution for £2 a month on a regular basis. But also, that they don’t have to. They don’t have to set up regular contribution at all. They can just set up the intent to contribute, and then they can just throw money at their PensionBee account, and we’ll invest it as and when they can throw it at us. So, they have a good month, throw in £100, the next month, nothing. Doesn’t matter. The next month again, nothing, doesn’t really matter. Month after that, putting £50, totally flexible. We’re there when they want to contribute.
PETER: Right. So that leads us on to the questions of lump sum contributions. So just assuming that you had a really good year, and you wanted to pay a big chunk into your pension, what’s the maximum amount that you can actually contribute?
MARTIN: So first, it depends on the type of company structure you have. So, let’s start with sole traders. As a sole trader, you will generally be limited by your income, and that’s capped at £40,000 pounds per year. So, say you earn £20,000 pounds as income as a sole trader. You can contribute up to £20,000 pounds into your pension contribution, into your pension pot. If you earn £60,000, you’re capped at £40,000 and that’s how it works for a sole trader. The second way it could be structured is if you’re a limited company or Director of a limited company. Now the treatment there is, again, based on income. But it’s important to differentiate that income doesn’t equal dividends. So, if you’re a limited company director, and you’re taking a mixture of dividends and salary, you’re limited to the salary and again, that same limit applies up to £40,000 per year.
PETER: Brilliant. Thanks for that, Martin, we now understand how that works for sole traders and directors. There is a question of what the tax treatments are for each of those. So, could we go a little bit into that and have a brief overview from your side?
MARTIN: Sure. So, for sole traders, and indeed, this applies to anyone that’s paying into a personal pension, as someone that’s taking income from an employer, they could be eligible for tax relief, which equates to 25% top up of the amount they contribute. So, what that means in real terms is, say you put in £100 into your pension. HMRC will put in an additional £25 as a way to incentivise people to save for their future. And at PensionBee, and I’m sure many other companies that we claim it on your behalf, you don’t have to do that yourself. We’ll make the HMRC claim and then you’ll just see that 25% tax top up go into your pension pot.
PETER: Question for you, obviously leading and building the product for self-employed with PensionBee, do you find that people are surprised of the tax relief element? Because essentially, its money back from the government really, is that something that you find surprises people when you talk about it?
MARTIN: It really does. And it’s amazing that we’re not shouting about this more and more, it’s free money and we should always be encouraging people to take advantage of that. Of course, that doesn’t apply to everybody, people have different circumstances and may not be able to put so much money into a pension. They might have mortgages, all that sort of stuff. That makes total sense. But whilst it’s there to be taken advantage of, and whilst we can’t give financial advice, consider it as something to look into very seriously because it is effectively free money.
PETER: And how does that actually work then for directors? Is it relatively the same principle from a tax point of view?
MARTIN: So no, as a director, if you’re paying in pre-tax, and so setting it up as an employer contribution to yourself, then you can get tax relief against your corporation and National Insurance contributions. So, you might not necessarily get the tax top up, but you can potentially reduce your tax obligations. Again, National Insurance and corporation tax depends on how you structured your company. But those are the two distinctions to make.
PETER: And I think that might be really good news for people who are running their own business, particularly with, obviously corporation tax set to increase fairly soon. And this leads on to the next question that oftentimes, people would rather put money into a savings account, particularly lump sums as well. What’s your argument against putting money into a savings account, rather than just a pension?
MARTIN: So, there’s the tax benefits, then there’s also the investment growth benefit, or potential investment growth benefit. Savings accounts currently attract a near zero interest rate and so that means people are people losing money in real terms. Inflation will erode those savings or potentially erode those savings. So, by putting your money into a pension pot, you can choose your investments and be invested in a range of assets, which could see rates of return above inflation. Now, past performance is no guarantee of future success. But it’s important to take these things into account.
PETER: And finally, question for you, say your business starts to take off and you begin to hire staff. And at that stage, what do you need to start offering your staff when it comes to their own pension?
MARTIN: So, this is known as auto-enrolment, and it’s immediate, and that might surprise some people. But employers need to offer a pension, as soon as they employ somebody. There are some nuances based on the age of the employee and how much they earn, but it is incumbent on the employer to check their duties from the outset of hiring that first person. So generally, they will need to choose a pension scheme that offers auto-enrolment, work out how much they need to pay into it, write to their staff to inform them of the scheme and their options, and then declare that compliance to the Pensions Regulator. And then do ongoing checks of their staff as their circumstances change and also check for any reenrolment for any staff that have chosen to opt out of that pension. But the direct answer is: straightaway.
PETER: So, for people who are listening to this, who may be in a position where they’re hiring people at the moment, where would you point them to go to find the right information, so they get this right first time?
MARTIN: There’s two key resources that I could suggest. One is the government website. So, in Gov.uk, there’s a section for workplace pension employers. And then also The Pensions Regulator, pensions regulator.gov.uk as well. And they’ve got a section there for people that are newly employing staff.
PETER: Brilliant. Thank you so much for that, Martin. By the way, guys, if you are interested in any of the links that we’ve mentioned, they will be in the show notes. So, make sure you go check those out. And if you’re the type of person who likes to get into the numbers of how tax relief also works, we’re going to have those in the show notes too, so be sure to check them out.
Now, that’s it for this episode of the Pension Confident Podcast. Thank you so much for listening. We do want to hear from you. So if you have any niggling questions about your pensions, then please get in touch with me or the PensionBee team by emailing firstname.lastname@example.org. That’s email@example.com or via Twitter @pensionbee and let us figure this stuff out for you. We’ll be back next month. So until then keep saving and stay pension confident.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.