Pension Planning for the Self-Employed

Pension Planning for the Self-Employed

Planning for your retirement is incredibly important. Self-employed individuals receive no employer contribution, or any of the other benefits of being in an employer pension scheme. However, signing up for a personal retirement pot is still important.

State Pension

Everyone, including those who are self-employed, is entitled for to a state pension

A new flat-rate state pension was introduced in April 2016; this is based completely on a person’s National Insurance record. The maximum value of this changes each year. It is £179.60 per week for the 2021/22 tax year. You may be entitled to more if you have previously been an employee.

Saving for retirement

This alone is not enough to see you through retirement. Therefore, it is important to save for your retirement. It is estimated that there are approximately 4.8m self-employed individuals in the UK. They make up 15% of the workforce, but only 31% of them are paying into a pension. 

As a self-employed individual it is your own responsibility to set up a pension. There are important tax breaks available so this is something you should be looking at. Tax relief on contributions is available up to either £40,000 per year or your annual earnings, whichever is lower. This means if you pay £100 into your pension the government add an additional £25. As a higher rate taxpayer you can also claim an additional £25 back per £100 on your tax return in England, Wales or Northern Ireland. The rule is a little different in Scotland. 

Starting your pension as soon as possible can really add up. The more time you have to save the more you can put away, benefit from tax relief and see your investment in funds grow.

What kind of pension is available?

A personal pension is the most popular choice for self-employed individuals. This allows you to decide what type of funds you would like to invest in. Basic rate tax relief is claimed back on your behalf by the pension company (provider). The amount that you get back at retirement will depend on how much you pay in and how the funds you choose perform. There are three types of pension: Personal pension, Stakeholder pensions which have a maximum charge capped at 1.5% and allow payments to stop and start, and Self-invested personal pensions. These SIPP’s have higher charges and a greater range of investment funds available.

Self-employed individuals can also use a NEST (National Employment Savings Trust). This is a special workplace pension from the government and has automatic enrolment; it is run for the benefit of its members. Whilst the scheme was conceived for employed people some self-employed people can also join.

The world of pensions can be confusing. Therefore, it is a good idea to consult an Independent Financial Advisor (IFA) to see what option would be best for your circumstances. They will be able to advise you on your personal allowance and providers. They could even discuss funds and your attitude to risk when it comes to investing.

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