‘I’m 36, with less than £10,000 in my pension – can I rescue my retirement?’

Chinelo Awa’s baking business is forecast to clear £100,000 of revenue by the end of the year – Paul Grover

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Chinelo Awa has spent seven years pouring her heart and soul into her baking business – but has badly neglected her pension and savings in the process.

The 36-year-old’s Battersea business, which makes luxury cakes for high-end clients, is forecast to clear £100,000 of revenue by the end of the year – a 54pc year-on-year rise.

But while the business is going from strength to strength, Ms Awa has a problem. Having devoted years to her baking upstart, she has not been contributing to a pension and has less than £10,000 saved in different pots from previous jobs.

Besides bolstering her pension, she also wants to find £3,500 to finish her law school exams and qualify as a lawyer.

Ms Awa is able to draw a salary of £34,000 as an employee director. She is about to move into an upmarket apartment complex in Battersea. The rent for the one-bedroom flat usually costs £2,700 per month but Ms Awa qualifies for an intermediate rent scheme because she works in the borough meaning she will pay £1,129 per month.

She has a Plum easy access savings account which is paying a competitive rate of 5.4pc interest.

However, Ms Awa says the ability to draw on the money easily means she often finds herself taking money out of her account and reinvesting it back into the business.

With no dependents (“not even a dog or a goldfish”), Ms Awa says she can live frugally and does not need much money. Having cleared £13,000 worth of debt, she wants to set aside £500 a month to build her savings and catch up on years of missed pension contributions.

James Jones-Tinsley, self-invested pensions technical specialist, Barnett Waddingham

Given the successful direction Ms Awa’s business is going, and the £500 a month she is able to save, I’d recommend finding a cost-effective Sipp and putting as much of that £500 into it as possible a month.

There are plenty of Sipp options available these days with fees as low as just a few pounds a month, so it shouldn’t take too long to find something that works.

Any contributions made to this scheme will benefit from 20pc basic rate tax relief. So if she wanted to keep £100 aside for more accessible savings, she can still contribute £400 per month and HMRC will top this up to £500.

This is a great starting point to create a positive savings habit, and build up her fund. And the benefit of a Sipp will mean she can save up to £60,000 gross per tax year, or up to 100pc of her earnings if lower, largely tax free under a pensions wrapper.

For the money she already has in a pension, I’m not sure what scheme she currently holds this in, but it may be worth revisiting the terms of the plan and – depending on any potential charges – moving this to a Sipp too. Not only would this boost her fund and consolidate it, but will also make it much easier to track.

Now it’s worth noting that a Sipp, although great for retirement, isn’t going to be accessible until later in life. So if Ms Awa wants to put £100 aside each month that is easier to get her hands on, depending on her goals, she might want to consider an Isa.

Cash Isa rates are great at the moment due to a higher bank rate, and have a £20,000 tax free savings allowance each year.

If Ms Awa is feeling a bit more ambitious, a Stocks and Shares Isa could also generate her some returns, or if homeownership is on her list then a Lifetime Iisa could be another option.

With the short-term sorted, it’s also worth thinking about the future. If her business continues to grow – she may want to consider speaking with a financial adviser about opening a small self-administered scheme (SSAS).

For business owners such, a SSAS is a great way to expand your business and grow your pension in a tax-efficient way, but you’ll need a decent pot before it makes sense to open one. While there are higher fees and regulations you need to consider, there are numerous benefits it can provide you as a business director.

At the moment, Ms Awa is drawing a healthy salary out of the business. If she can make any contributions to her pension as an employer, this can be treated as a deductible business expense giving her further tax efficiency.

A SSAS can allow her to withdraw a loan from the fund to invest in her business – for example, if she needs to purchase new equipment, hire new staff, or needs funds for other growth projects.

Additionally, if she doesn’t currently own the premises her business operates from, she can purchase the property and keep it as a commercial investment within her pension – this means your commercial rent would go to your personal pension.

If she really wants to better understand these nuances, the gov.uk website is littered with advice for small business owners and I highly recommend speaking with an adviser who can give some further clarity.

Paul Derrien, investment director, Canaccord Genuity Wealth Management

The Plum savings account is good, however the income Ms Awa is receiving will be taxed if it is not in an Isa. Plum offers one of the highest rates at the moment for cash Isas, so she should be able to switch across to this instantly.

In terms of investing, there are a number of potential solutions. It looks like the funds will be surplus and can be invested for the long term and added to, so it would make sense to try to seek returns greater than those available from cash deposits.

This should be done in a way that she is comfortable with. All the investing can take place within an Isa and avoid tax and, therefore, finding an Isa that will take modest regular payments and invest them in a cost-effective way is paramount.

Providers such as AJ Bell and Hargreaves Lansdown can provide this service and AJ Bell also offers a range of risk-controlled portfolios that she could invest into depending on her overall attitude to risk – for both her savings and pension.

If she used the same provider for the pension and Isa, she could have oversight of both in one place and be able to switch the risk profiles as and when required. She could also move some of the Plum cash into her Stock and Shares Isa to make it less accessible – albeit it will still be easy to access these Isa funds if your circumstances changed.

There are many alternative companies that offer a similar investment solution to AJ Bell, in fact most of the large asset managers such as Abrdn, Vanguard etc do, some of which provide a risk profiling questionnaire to help guide potential investors to a specific risk profile and investment.

They are far from perfect, however, it would be sensible for Ms Awa to look at these as well, as a sense check to see if their questionnaire outcomes align with her risk level or suggest that she is taking too much, or too little, risk with any investment choices.

Even if she doesn’t wish to invest into one of the AJ Bell Funds, the platform could be used to make investments elsewhere – though this could work out a little more costly and this needs to be considered when making any choice.

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