THERE IS A GROWING TREND for young graduates to consider the option of entrepreneurship and self-employment. It is therefore useful to consider retirement planning as it would apply to this growing special group.
Self-employed persons need to prepare for their retirement too. Yet, for those self-employed persons where the profits or cash inflows are unstable and/or relatively low, retirement saving may be the last thing on their minds.
The entrepreneur who works at setting up a business is typically so focused on the prevailing challenges that he spares little thought for his longer-term financial needs. Most times, it takes an independent adviser to jolt him into considering the need for retirement planning and financing.
For those self-employed persons who command a relatively high and stable income, retirement planning can be somewhat easier to contemplate.
Yet, in some instances, some high earners do not explicitly prepare for retirement or for failing health. This may result in them selling off assets during retirement, or during a rough financial period, just to maintain the lifestyle to which they have become accustomed. Worse still is that they may have to forfeit that lifestyle just to survive.
For self-employed businesspersons struggling to meet the regular expenses of their operations, finding and setting aside a regular sum toward retirement is usually a major headache. To make matters worse, the National Insurance contribution for the self-employed person is higher than that for employees.
Then adding to the challenge for the self-employed is the prevailing lack of ways to save toward retirement by way of an income tax break or making contributions in a tax-deferred way. There is still some advantage in contributing to a registered retirement savings plan though.
This is because, although the savings are made on an after-tax basis, any earnings or gains made whilst the funds remain in the plan are not taxed until the funds are drawn down. If the funds were just saved without the protection of being in a registered retirement plan, then the annual earnings would be taxed, removing some funds from the savings pool that would otherwise have remained and earn additional returns compounded over the years.
The option to accessing tax-efficient retirement savings is complex and uninviting. It would involve incorporating the business, and establishing a registered pension plan where the self-employed person becomes an employee and member of the corporate pension plan. This is a daunting prospect given the myriad of regulatory requirements of administering such a pension plan in compliance with the Occupational Pension Benefits Act.
The other disadvantage of holding a registered pension plan for the self-employed person is that once the funds have been paid into the plan, that money is not available to their business.
It is therefore imperative that self-employed persons make retirement planning an explicit and serious part of their overall financial plan from as early as possible in their careers.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: LouiseFairsave@nationnews.com. (This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.)
