Helen Morrissey talks to a panel of experts about the factors that prevent self-employed people from accessing financial advice
Tina Boden, founder, Enterprise Rockers
Sandra Hogg, editor of Techtalk, Scottish Widows
Kanes Rajah, dean and professor of entrepreneurial behaviour and innovation, Royal Agricultural University Cirencester
Chair: Helen Morrissey
Helen Morrissey: We have been in difficult economic times and there are plenty of costs to running a business. How much does this get in the way of someone putting a long-term plan into place, such as starting a pension, for instance?
Kanes Rajah: I think many do not really have any idea of what a planning timeframe is. Is it for two or three years, or five years? So, day-to-day costs are very relevant. Ten-year strategies are important because business owners might have children to send to school. They might have elderly parents they might have to look after and so on.
But then, in the longer term, it is providing for themselves. So when they are planning for all of these things and running a business, many a time they really lose sight of the fact that they have to plan at all. It is a coping strategy.
Tina Boden: One of the other issues is if somebody is starting out in business, there is so much focus put on having a business plan and a cash flow. These are the things you need to start out in business. To me, a business plan is something that you need when you know whether you can get any customers or not.
So, if you think about it, it is very rare for you to say: "I'm going to invest this amount of money in my pension every month" because that money that you would put into a pension, you could put into marketing your business or buying a new piece of machinery.
Morrissey: Sandra, some really interesting points have been brought up here about the importance of long-term planning. I think sometimes, the day-to-day stuff gets in the way of long-term planning. Is this an issue that you receive a lot of questions on?
Sandra Hogg: Certainly, from the time when I was an accountant advising smaller businesses, I'd totally agree with what you are saying. That is my experience too from talking to small businesses. The set-up costs, the time involved and the enormous amount of time in making a business successful can sometimes get in the way.
There is a need to access monies, particularly in the early days of the business, when income levels could be quite low or erratic, and a need to keep money aside for fluctuations in income. The self-employed also have to pay their tax in lump sums in July and January, and they need easy access to money to be able to do that.
Rajah: Sandra is touching on something very important. When I started a business about 20 years ago, it did not occur to me at all that I needed to worry about pensions. This is what I'm finding, even with the graduates that I am involved with now. We are supporting them in how to access funds and how to set up a business plan, as well as short-term planning. But pensions don't come into it. We have to plan ahead.
Morrissey: Tina, can you give me a bit of insight as to your experience of accessing financial advice and what were the difficulties you have faced?
Boden: I'm probably the financial adviser's nightmare and I don't have a pension! One of my businesses was actually a property lettings business and I see that as my pension. So I have done it in a slightly different way.
But I have to say that even accessing a loan or mortgage is an absolute nightmare. However long you have been in business, whatever assets you have, unfortunately there seems to be this stigma about the self-employed.
One of the things I recommend to my clients is that they bootstrap rather than borrow so they do not end up with a lot of money that they have to pay back.
Morrissey: You have talked more about a portfolio approach to financial planning, where it's not just a pension. It might be property or investing in other businesses. Do financial advisers need to take a different approach with the self-employed?
Boden: They do need to take a different approach, but I don't think it is just financial advisers. For example, my eldest son is a self-employed plumber and he is part of a construction industry scheme, which means he has his tax deducted at source by the contractors.
Now, I know that one of the banks has been good at giving him a mortgage because he was on that particular scheme. But actually, myself, who is not on that scheme, I was probably their nightmare. I think all of that has got to be looked at as part of the bigger picture.
Rajah: I don't think enough of the self-employed understand there are different ways of pension planning and different investments available that are low, medium and high risk. There are some important benefits.
Plus, of course, the government also said recently it is going to relax the rules, so this should also be an added benefit. I don't think enough self-starters understand what is available to them.
Morrissey: Sandra, one of the big issues – particularly after the Retail Distribution Review – is that it is difficult for advisers to service certain groups in a cost-efficient manner and self-employed people who may not be earning much money could fall into this category
Hogg: You hear plenty of concerns about this and it is something that does need looking at. Government, providers, the financial services industry generally and advisers could be working together to come up with solutions for what is a huge number of people who will really need advice.
Regulation and legislation is changing so rapidly, so they need to keep up with what is possible in terms of pension funding and taking pensions at retirement. There is so much they are going to need help with and I think education is key.
Self-employed people all have to register with HM Revenue & Customs. There must be some way there of triggering a piece of guidance to get them thinking about what help they might need. Finding a way to provide that help cost-effectively is going to be a challenge.
Boden: Micro businesses – so the nought to nine employees – make up 95% of the UK business community. A lot of those businesses are members of organisations or, for example, with us – with Enterprise Rockers – we are an informal community.
Now, if we brought those people together, the advice to some extent could be delivered as a group. Delivering that information as a whole might be a solution to the problem rather than looking at each individual and thinking their income is not particularly high.
Morrissey: If we can move on to a bit more about the planning considerations for the self-employed. We have mentioned that maybe financial advisers need to change their approach because the day-to-day financial concerns of the self-employed are different to people in full-time employment. Can you just tell me, as a small business owner, what are your key day-to-day financial concerns?
Boden: The key financial concerns are getting the money in from the invoices that are sent out. You set terms and payment terms, but actually, if somebody hasn't got that money to pay you at that period, it has a knock-on effect.
So you have to make sure you've got your customers to get your income; and, once you've got your customers and you've invoiced them, you have to make sure that they are going to pay you.
The financial adviser and pension company are a long way down that pecking order because once you have the money in, you then have to pay your mortgage, your food bill and all those different elements.
Morrissey: But again, it is an area where financial advisers can help. In a previous round table, we talked about the importance of making sure self-employed clients have put away enough to pay their tax bills, etc. What can advisers do to highlight how they can help the self-employed a bit more?
Rajah: Cash flow is absolutely key. I could only consider the pension scheme when I was sure of longer-term income coming through. When I set aside some money, I did that because my accountant advised me how I could do that or that it would be in my interests to do so. The financial adviser has to understand the circumstances of that particular business.
One final thing, though, is about the bad press we have had about failing pension plans in company schemes, and so on. The financial adviser has a serious issue to overcome to get the message across that this is not what normally happens in the industry.
Hogg: There is a big appetite for advisers to work with accountants, and a lot do very successfully already. More and more, that will be key so that t'hey get down to the nitty-gritty of the particular business so they are aware of what money is coming into the business in the future.
Obviously, things come along which you can't plan for, but there are some things you can at least think about. For instance, what happens if somebody makes you an offer for the business? What will you do then? What would be the right amount of money? What would be the right time to sell?
Getting home the fact that starting saving early – however you are going to do it – is the key. Whatever you can do to find money from somewhere to put away early, I think, is going to be very important.
Morrissey: I think it also comes down to understanding your market as well. I know Tina said earlier on that pensions might not be top of her agenda because if she has spare money, she might decide to launch a new business with that. This approach to finances is what we would call a portfolio approach to finances, where you might be investing in property or a new business. Do we need more understanding that this is what your goal is?
Boden: Yes, I think so. It is an understanding of: "Yes, you have invested your money in property. Yes, this will bring you a return. No, you don't want to do it this way." That will then build up the confidence, but there has to be a clear understanding that things will be done differently. My investment in property – for me – it is another business, so that is the thing that I like.
Hogg: It is a very good point that each self-employed person is an individual with different backgrounds, different ways they have come into being self-employed, and you can't apply a one-size-fits-all approach.
As you say, people that have come from jobs where they have had pension funding, they probably more naturally would consider that. Most people starting up from scratch may have a different attitude.
Morrissey: We do get very fixated on pensions when we talk about retirement planning. Do we need to just widen this out, particularly with the self-employed and say a pension will be part of your retirement planning but it won't be all of it? You might build up a pension to give you a steady level income to cover your subsistence needs, but then there are other investments coming in on top of that that will top that up
Rajah: Of course, yes. We have to agree in the longer term that state support is going to be very little, so we have to start planning ahead. Of course, if the world of work is changing – and there are going to be more of us around – we will still be working into our 80s and 90s. Within that scheme of things, to have a steady income every month, paying some of the bills is going to be very important.
Morrissey: You mentioned self-employed people could be working into their 80s or 90s. The Budget has brought massive income flexibility to pensions. Do you see self-employed people sweating their pension assets a bit more if they could access that money and plough it back into a business?
Hogg: Certainly, there are massive new flexibilities and it will be interesting to see what impact this has on pension saving. Yes, there are opportunities. Obviously, there are restrictions being brought in to make sure that excessive amounts of tax relief aren't claimed, and so money isn't sort of ‘magicked' out of thin air from the government pot, which I think is an important factor but certainly the new flexibilities are very interesting.
It does bring home this point about education and guidance, which is all over the media at the moment: how is this guidance going to be provided and how is everybody going to access the information they need to plan properly for their retirement?
Morrissey: Sandra, you field so many questions from the industry. What are the key questions that you deal with regarding self-employment?
Hogg: We run a technical helpline for IFAs to ask us questions, mainly on pensions-related issues. The key issues are around the complexities of pensions tax relief, how much somebody can put into a pension (annual and lifetime allowances, fixed and individual protection).
There is so much complexity in pensions legislation and those are really the key issues, particularly when it comes up to tax year-end and people are thinking about maximising their tax relief.
This is a particular issue for the self-employed, making sure that they have married up the amount of profit that they made with the amount of pension funding they can do most tax-efficiently. There are plenty of tax benefits with pension funding, and it can be done very tax-efficiently, but it does need a lot of work.
This is an edited version of a video roundtable. Click here to listen to the whole discussion
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