Investor Views: Self-employment is a Challenge to Pension Saving

Private investor Andrea Mason tells Morningstar how saving for retirement has been less of a priority since she became self-employed - and she regrets not investing more

Emma Simon 4 May, 2016 | 12:01AM
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Like many people in their 40s, Andrea Mason, a freelance proofreader, says she’s worried she’s left it too late to save for her retirement.

It be scary locking money away when I don’t know what my earnings will be in the next six months

“The lion’s share of my retirement savings are in an older workplace pension, from when I was in full-time employment. But I am regretting not putting more into in when I had the chance,” she says. “I don’t know whether I can save enough now to make a difference.”

At the time Mason opted for the default option on her workplace pension, only saving the minimum amount from her salary. “Looking back I probably could have afforded more. This would have been a good opportunity to build more of a safety net.”

The Challenge of Retirement Saving

Mason has found it harder to save since she started working for herself. “My income is more uneven. I do try to put some aside during periods when I’m earning more, but it can feel a bit scary locking this money away when I don’t know what my earnings will be in the next three to six months.”

Mason adds: “In the last few years we’ve moved into a bigger home, with a bigger mortgage. I’m also trying to save for my two children too, so I’ve ended up with a hotch-potch of different savings and investment plans.”

These include Junior ISAs for her two children, into which she makes regular monthly savings, an investment ISA, a SIPP - into which she’s made a  lump sum payments, plus a handful of Premium Bonds and cash ISAs.

Long-term Saving for the Next Generation

Initially Mason opened Child Trust Funds for her children, but she converted them into Junior ISAs last year. “It gave me the opportunity to review how they had performed. I decided to switch out of the more expensive stakeholder fund they were initially invested in, and hopefully achieve a better return on my investment.”

She has split these ISA holdings into two funds: Woodford Equity Income and passive fund Vanguard Lifestrategy. Mason says: “Initially they had been invested entirely in passive tracker funds, and I like the idea that these have lower fees. But I decided to put half in the Woodford fund on the hope of getting a higher return. I guess I’m trying to hedge by bets by having a little in each camp.”

Neil Woodford, manager of the eponymous fund, enjoys the reputation of one of the UK’s most successful managers. He has a Bronze medal rating from Morningstar, reflecting its confidence in him to continue to outperform peers over the longer term.

An analyst at Morningstar says: “The strategy of this fund is clear: to generate a positive capital return in the long term, and growing this income while offering capital preservation.

“Woodford has proved willing to stick to his strategy even during periods of poor performance. As a result his 34 year track record, which encompasses numerous market cycles, is strong.”

The Vanguard Lifestrategy fund has a five-star rating from Morningstar, reflecting its strong performance against peers in its sector.

The fund Mason has selected is 80% is made up of 80% equities and 20% fixed income, a portfolio chosen by Vanguard and made up of low cost passive funds.

Delaying Retirement Investing Results in Missed Gains

Mason has found it harder to install the same discipline when it comes to her own retirement savings. “I delayed setting up a SIPP as I wasn’t sure about committing a lump sum to the markets. I didn’t want to invest several thousand pounds and see the markets fall the next day.  By delaying I probably missed out on some gains.”

Initially Mason planned to invest a lump sum then set up a direct debt to ensure a monthly amount goes in. However, while she has made the initial payment, instead this has just been topped up once or twice a year.

At the moment her SIPP is invested in Invesco Perpetual High Income. “The idea was to invest in one core fund holding to start with, then diversify into other funds. But I’ve only made one or two payments into my SIPP to date.

“I’m hoping in the next few years to make more serious investments into my SIPP to get my retirement plans back on track. Sometimes it feels like I won’t be able to save enough - so is it worth saving at all?  But I have to tell myself that’s quite a self-defeating attitude!”

This Invesco fund has a four star rating from Morningstar, and its manager Mark Barnett has a Bronze-medal rating.

Morningstar analysts consider Mark Barnett to be a skilled UK equity investor and although team changes in 2014 where he replaced departed manager Neil Woodford and his workload temper their conviction in the fund.

ISA Investments in Tracker Funds

Elsewhere, Mason says she has a couple of older ISA investments in L&G tracker funds: these include one tracking the FTSE All-Share and one tracking the European Index, the L&G European Index Trust. She says: “The performance of these has been pretty poor of late, although I realise that is a reflection of the market. I haven’t added to these ISAs for quite a while, so I wonder whether it more make more sense to move these holdings into my SIPP.”

Mason is also considering cashing in some of her Premium Bonds. “I get a £25 prize on a fairly regular basis, but I realise these probably aren’t particularly good investments. But I like the fact though that my money is accessible, should we hit a bad patch financially - and in the meanwhile there is also the chance of a more substantial prize.”

What funds are in your ISA or SIPP? What have been your most successful investments to date? If you'd like to feature in Investor Views and tell us about your investment strategy please contact the Editorial team on UKEditorial@morningstar.com

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk