The following is a transcript of a bonus episode of The Pension Confident Podcast - Personal finance tips for the self-employed. You can listen to this bonus episode or scroll on to read the conversation.
PHILIPPA: Hello, welcome back. Today, we’re sharing a special bonus episode all about managing your personal finances when you’re self-employed. PensionBee has been looking into this and its new Invisible Worker research tells us more than half of the British gig workers surveyed say they can’t afford to save into a pension. Nearly 30% of them also said they wouldn’t know where to start if they did want to set one up.
So today, we’re going to hear from a range of experts about how to save into a pension even if your income is unpredictable and how to keep your eye on the long term money picture even when your daily working life is taking up a lot of your energy.
Before we get into it, here’s the usual reminder that anything discussed on the podcast shouldn’t be regarded as financial advice or legal advice, and when investing your capital is at risk.
We’re going to start by going back to one of our most popular episodes - number 17 which was all about whether you should save into a pension or an ISA. The Financial Times’ Consumer Editor Claer Barrett joined us for that one and she shared her thoughts about how and where you might stash short-term savings in preparation for your next tax bill.
CLAER: I think the hardest thing for people who’re self-employed is feeling confident enough to lock money up, where you can’t get to it. That’s one of the reasons that pension saving among the self-employed is so low. But also, if you think about how your earnings can fluctuate when you’re self-employed. The luxury of having a salary where you’re getting the same amount of money hitting your bank account every month, where you don’t have to phone up your employer repeatedly to say ‘hello, can you pay me?’ - which is the life of the self-employed. Late payments are an absolutely massive problem for small businesses and for self-employed people. You may not get paid for something for months, so if you don’t have short-term savings pots to raid, then you’re gonna be in trouble.
So, say you’re paid £1,000 for a job, then you’d probably wanna put at least 20-25% of that money away for the tax bill that’s eventually gonna arise. That trips up a lot of people. But then maybe put another 10%, as Damien was saying, into an accessible place where you can reach it. Maybe an ISA, maybe premium bonds? You could win a tax-free prize while it’s sitting in there. But then if you can live without it for a year, then it’ll give you more confidence that you could actually lock it up into a pension, or invest it for the long term using a Stocks and Shares ISA.
PHILIPPA: Here’s Damien Fahy, Founder of Money To The Masses talking about how he balances looking after his business, his employees AND his family.
DAMIEN: I was the person who was only saving into ISAs for years, that was me. And part of that was down to flexibility because I had a young family and there was always that element that I might need to get the money out. And then I started running Money To The Masses. So effectively becoming self-employed meant then that I missed out on Auto-Enrolment. So ISAs, at one point, were a good way for me to start investing. But they also gave me the flexibility I needed, with a young family and if you wanted to buy a house and all those things.
So when I talk about my scenario, it’s because I’m technically a business owner. My staff are auto-enrolled and they all get the match on pension contributions. But then for me, as somebody who runs a business, you’re focused on the business and your staff, and you sometimes then have to take a step back and go, ‘well there’s something beyond this, I’ve got a family, I’ve got a future and I don’t wanna do this forever’. And so, there’s a point where you have to start doing exactly what Claer suggested and you have to start trying to put more money away each month.
PHILIPPA: If you’re a business owner, you might be wondering whether your business could also be your retirement fund, in the same way you might see property as a retirement fund. But according to Emma Jones CBE - founder of Enterprise Nation (she joined us for episode two) - that’s not quite as straightforward as it might sound.
EMMA: 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’ve 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.
PHILIPPA: But realistically, if you’re self-employed and/or running your own business, there are going to be a lot of demands on your finances and some of them are going to be very pressing in the short term. Here’s Emma again.
EMMA: Anyone who’s listening who runs a small business or [is] 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’ve 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 [list] when business owners are very much for the here and now.
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.
PHILIPPA: Speaking of keeping money aside in a separate account, here’s PensionBee’s Chief Business Officer UK, Lisa Picardo from episode 24 talking about something we mention a lot - that all-important cash cushion.
LISA: I think when you’re starting a business, it feels like everything, right? It’s your baby, it’s your passion, you’re so into it. But actually there’s a whole life outside of that as well and that has to continue. You need a roof over your head, you need to pay for your children and you need to keep the car going. You need to do whatever it was that you were doing before.
PHILIPPA: How big a cash cushion should you keep aside? Six months’ expenses or, I mean, what’s your suggestion on that? Because it matters, doesn’t it?
LISA: I’m not sure there’s one answer to that. I mean, I think it really depends - I think there’s two sides really, which is one, what are the factors around your business? And then the second is what are the factors around your lifestyle? Are you on your own? Do you live with someone? Do you have a partner that can help shoulder that financial responsibility of life whilst you’re starting your business? So I think it’s a very individual decision based on your circumstances.
PHILIPPA: Back onto pensions now and for self-employed people one of the common worries is how they’ll manage those contributions if their income varies from month-to-month. Here’s PensionBee’s VP Product, Martin Parzonka from episode two with a solution for that!
MARTIN: 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.
PHILIPPA: Let’s hear from Martin again as he explains why contributing into a pension - even if you aren’t able to commit a big sum every month - can be more beneficial than just stashing the money in a savings account.
PETER: 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. 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.
PHILIPPA: And finally, let’s hear again from Emma Jones as she shares a helpful way to keep your eye on the long-term when you’re trying to run a business and save for your future.
EMMA: 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.
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.
PHILIPPA: That’s it for this bonus episode and we’d love to know what you think was the most helpful takeaway? Let us know in the comments or email us at podcast@pensionbee.com.
You can listen back to all the episodes we mentioned in full on our feed - just look out for episodes two, 17 and 24. You can find us on any podcast platform and remember we’re on YouTube and in the PensionBee app too!
A last reminder before we go that anything discussed on the podcast shouldn’t be regarded as financial or legal advice. When investing, your capital is at risk.
Thanks for listening. See you next time.
Risk warning
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.
