Retirement planning for therapists – build a pension pot

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If you’re a sole trader, you need to sort out a decent pension for yourself because no one else will, warns pension expert Neil Adams.
The sustained growth of what’s now called the ‘Gig Economy’ along with sweeping changes to retirement patterns in this country means that there’s a record 4.6 million or more self-employed people in the UK – around 50% more than there were at the turn of the millennium.
This means that something like 15% of Britons now wake up every morning as their own boss. Unfortunately, according to our recent research, these bosses have done a pretty poor job when it comes to providing pensions for their employees…
Every year, Drewberry Wealth conducts one of the UK’s largest surveys into the wealth and protection habits of British working people. Our findings show that while auto-enrolment has been a huge boon for the average worker, one that’s helped to scoop millions of lower-earning employees up into the pension system, it’s understandably done nothing for the nation’s self-employed.
Bringing up the rear
In pension terms, the UK’s self-employed are rapidly becoming an underclass. Our research shows that only around 1 in 4 self-employed Britons have a personal pension at all (although just over 1 in 6 also claim to have an old company pension). Meanwhile, almost a third of self-employed people (32%) admitted to having ‘no idea’ how they were going to fund their retirement with a depressing 44% believing that they’d never be financially secure enough to retire.
This explains why something like half of those to swell the ranks of the self-employed in the last five years or so are part-timers, a great deal of whom are already in what they might once have considered their ‘retirement years’.
There are two distinct groups in this grey army. The first consists of those in good health who can afford to retire but, in keeping with our changing lifestyle patterns, prefer instead to keep at least one ‘oar in the water’. The second is made up of ‘pension conscripts’, namely those who have no choice but to keep on rowing. It’s not difficult to guess which group is having the most fun.
How much does it cost to retire?
A recent Which? survey of retired Britons found that it currently costs the average couple around £18,000 a year just to keep the lights on in this country. If you want to do more than just pay the bills, clothe and feed yourself in retirement, a ‘comfortable’ retirement that includes an overseas holiday now and then, or the odd new car as required, will cost closer to £26,000pa.
Assuming you can demonstrate the full 35 years of National Insurance contributions, the new-look state pension will now pay a ‘flat rate’ of £155.65 a week to someone who was self-employed, a significant hike from the previous maximum of £119.30. Even so, this only comes to just over £8,000 a year leaving the average self-employed person needing to find at least another £10,000 a year in pension income if they’re to fund even a basic standard of living in retirement.
Thankfully it’s not difficult to fix, especially if you’re willing to roll up your sleeves and get on with it.
Getting on with it
The good news is that the British pension regime remains one of the most generous in the world. The tax relief HMRC pays on all pension contributions means that there’s no better way to save up a large lump sum for some point in the future. (Any time after the age of 55 as it happens).
In fact, it’s so effective that, thanks to the compounding that occurs over longer time frames, the most expensive mistake you can make when it comes to planning for your retirement, is to put off starting a pension until it feels like you can afford sizable contributions. Unfortunately, for most of us, this day never comes!
In a recent study, we found that a basic-rate taxpayer who pays a flat £250 a month into their pension from age 25 to age 65, and receives full tax relief, would be sitting on a nest egg of £622,341 by the time they reached retirement (based on a compound growth rate of 6% pa). If they delayed by just 10 years the same pension would be worth almost half as much – just £313,911!
Once you’ve decided to get on with it, you need to choose the right pension wrapper and to calculate what you can currently afford to contribute to a pension, what that’s likely to be worth once you reach your retirement drop zone and how long it’s likely to last from there. Fortunately, that’s now one of the easiest parts of the puzzle.
Choosing the right wrapper
Once upon a time, there were three main types of personal pension wrapper: stakeholder pensions, personal pensions and self-invested personal pensions (Sipps). They all did the same thing, but stakeholder charges were pegged by the government making them a guaranteed ‘low-cost’ option.
Personal pensions charged a little more but generally offered more investment choices. Sipps were the most expensive as they offered the greatest range of investment choices while full Sipps also offer the option to hold and trade a far wider range of investment assets, including properties such as business premises.
These days the lines have blurred. A good Sipps contract is probably no more expensive than the average stakeholder pension but, by offering a galaxy of investment choice, it’s likely to represent the best opportunity for your pension savings to perform over the long-term.
Technically, the government NEST scheme will also now accept contributions from self-employed people, but with just five funds to choose from it’s probably worth paying a fraction more than the market-beating 1.8% charge on each contribution and the 0.3% annual management charge it imposes.

Making your calculations
The best way to work out how much you should be contributing to your pension is to calculate how much your current contributions will deliver by the time you reach your target retirement age. From there, you can work out the income this nest egg will provide and how long it’s likely to last. The whole process is rather fraught as you’ll need to make a whole heap of assumptions about inflation, growth rates and your own mortality.
Of course, you could always take a short cut. Drewberry have built this useful calculator to figure out all these numbers and it’s very simple to use.
You can choose any level of potential contribution and because it can deal with both the accumulation and decumulation (income withdrawal) phases of your pension planning, it will also show you just how long your notional retirement fund’s likely to last.
There’s no secret formula to building a decent pension pot. We all need to start contributing sooner rather than later and put in as much as we can as the years go by. Those who don’t could literally be working until they drop.
Neil Adams is Head of Pension Planning
at Drewberry Wealth Management