Left out of Pension Schemes? Consider IFISAs as the Solution for your Financial Future
9th April 2019
With an ageing population and economic uncertainty, saving for the future has never been more important. Reassuringly, most workers now have a pension thanks to the auto-enrolment scheme first introduced in 2012.
But as the state pension is currently just £164.35 per week and not payable until you are 65, it’s essential to have a realistic plan for the future. Furthermore, if you’re self-employed or an entrepreneur, you may have been left to fend for yourself. This important subset of the economy does not tend to cultivate the habit of investing in pensions. Recent research from Prudential reveals that 36% of self employed people can’t afford to save into their pension, with almost half (43%) not having one at all.
However, the Innovative Finance ISA (IFISA) can provide the perfect solution for entrepreneurs seeking to take their financial futures into their own hands. While not a direct replacement for a pension, IFISAs are held within a tax wrapper which allows funds to grow tax-free.
Similarly to pensions, IFISAs allow investments to grow tax-free. Entrepreneurs are able to use IFISAs to invest up to £20,000 per year with funds being shielded from income tax. This saves entrepreneurs from losing out on up to 60% (if annual earnings are between £100,000-£120,000) on the returns generated from debt investments. Higher levels of return over time are also available due to the magic of compounding interest.
Additionally, a clear advantage of their tax treatment over pensions is that no tax is payable once funds are drawn down upon and released. While the earnings from IFISAs do not have to be declared or accounted for on tax returns upon release, in most instances pensions have to be accounted for with income tax being paid on returns.
Unlike regular employees, entrepreneurs do not have a set level of income month on month and their earnings can differ depending on the fortunes of their businesses. Additionally, entrepreneurs tend to use tax-efficient remuneration strategies, meaning that they pay themselves lump sum dividends once or twice a year.
IFISAs are more flexible than auto-enrolment pensions, which normally require employees to pay a set percentage of their monthly salaries. Instead, IFISAs allow for investments to be made on an adhoc or regular basis. This makes them particularly useful for entrepreneurs who can invest based on their income pattern, as opposed to being locked into a set plan.
Back fellow entrepreneurs and make new connections
Alongside having the potential to generate tax-free returns of up to 8.7% (before fees and bad debts), Crowd2Fund’s IFISA allows entrepreneurs to back and lend money to their own peer group. They are therefore able to relate to other business owners who are trying to solve problems, launch new products and services and grow the British economy.
Additionally, by reviewing campaigns on the platform and asking questions on the forum, they are able to make meaningful connections with other business owners who may prove useful for their own companies as potential customers or suppliers, for example.
Match investments to be in line with risk profile
Entrepreneurs tend to be more risk-taking: it takes guts and determination to start and grow a business, after all. Crowd2Fund offers the only self-select IFISA on the market which allows investors to directly pick and choose the businesses they want to lend money to.
This means that entrepreneurs are able to pick investment campaigns which carry a higher risk and a higher level of returns, greater than 10%. Such a strategy may be adopted for successful business owners who already have a track record of selling companies or who pay themselves out substantial dividends.
While entrepreneurs may not be able to make regular lump sum payments into pensions on a monthly basis similarly to their PAYE peers, getting into the habit of tax free investing through the IFISA will likely generate inflation-beating returns and growth over the long run. Get started on your investment journey today.
Past performance and forecasts are not reliable indicators of future results. Your capital invested is not covered for compensation in the event of a loss by the FSCS. Tax treatment will depend on the individual circumstances and may be subject to change. Please see our Risk section before making an investment decision.