When you’re self-employed, you have countless things to think about and saving for your retirement is probably very low on your list of priorities. It’s important to have some financial security in place for your future, however, not only to enjoy a comfortable lifestyle when you’re retired but in case you’re unable to continue working later on in life even if you want to.
Why do you need to arrange a pension when you’re self-employed?
When you work for someone else, you’re usually entitled to enrolment in a workplace pension scheme via your employer. When you work for yourself, you don’t have that luxury so you need to make sure you arrange your own pension. Although you’re entitled to the State Pension, the weekly payment amounts are limited and unlikely to cover your normal living expenses, let alone allow you to have an enjoyable lifestyle during retirement. You also can’t receive these payments until you’ve reached the State Pension age — unlike a personal pension, which offers more flexibility on this. You may also have considered investing your money elsewhere but pensions generally provide better returns than other forms of saving.
The types of pensions available for self-employed people
There are a few options to choose from when setting up your self-employed pension, which we’ve detailed below.
A standard personal pension
Also referred to as a private pension, your money is invested in a wide array of funds and assets. A personal pension is typically created as a defined contribution pension, which means the amount in your pension pot depends on how the investments perform and how much you’ve contributed to your pension fund. You can make regular payments as well as one-off contributions, which is convenient if you have an irregular income.
A stakeholder pension
This is a type of personal pension that has to meet government requirements. These can include minimum contributions, capped fees and the option of a default investment fund if you prefer not to choose the investments yourself. A stakeholder pension also offers you the flexibility of regular and one-off contributions.
A self-invested personal pension (SIPP)
With this type of personal pension, you have much more flexibility. You can decide how your money is invested and benefit from a much wider choice of investments. You can also choose between funds, stocks and shares, trusts and more. Just like the other types of personal pension, you can make one-off or regular contributions to a SIPP.
A National Employment Savings Trust (Nest) pension
This is a workplace pension scheme that has been created by the government. Unlike the State Pension, which is funded by taxpayers, Nest pensions are funded by contributions from employers and employees. Although this scheme is designed to provide an easy auto-enrolment solution for employers to comply with the Pensions Act 2008, you can benefit from using it if you’re self-employed. If you decide that self-employment is not for you in the future, you can still pay into your pension pot and so can your new employer if they also use Nest.
How much can you pay into your self-employed pension?
The level of contributions you make depends on the amount you’d like to be in your pension pot when you retire and what you can afford to pay into your pension plan. There’s no limit as to what you can pay, though, only on the amount that’s eligible for tax relief. You have an annual allowance, which is currently £40,000, and any contributions you make that are above this allowance won’t benefit from tax relief. You can, however, carry forward any unused allowance you have from the previous 3 years.
The benefits of having a pension when you’re self-employed
There are many advantages to setting up a pension when you’re self-employed:
- When you’re ready to either stop working or significantly cut your working hours down, a pension provides you with an essential income.
- A pension provides financial security should you be unable to work later in life due to circumstances that are out of your control.
- You get 20% tax relief on your pension contributions. If you pay tax at a higher rate, you can claim a further 20% in tax relief when you submit a self-assessment tax return.
- You can access your personal pension when you’re 55 (this will increase to 57 in 2028).
- There are flexible options for withdrawing money from your pension pot. For example, you can withdraw a tax-free lump sum of up to 25%. The remaining money can be taken as cash, you can opt for a guaranteed income product or you may prefer a flexible income option.
- Your beneficiaries can receive your pension without having to pay inheritance tax should you die before the age of 75.
Combine your pensions
To maximise the potential of your pension growth, consider combining your pensions. You may have had a workplace pension before you became self-employed or a personal pension that you stopped paying into when you had to be more careful with your finances. When you transfer your pensions into a single pension plan, they become much easier to manage and are more cost-effective as you’re only paying fees for one pension. You can also benefit from the flexibility and choice available with newer pension schemes compared with when you first started paying contributions. Not all pensions should be transferred, however, so it’s recommended to check with a qualified financial adviser first as you may lose important benefits otherwise.
Enjoy financial freedom in your retirement with a self-employed pension
At Trinity Finance, we work with an independent financial organisation specialising in ethical pensions. They can discuss your investment preferences, attitude towards risk and financial goals. As well as that, they can give you impartial advice on alternative investment strategies, such as ISAs and bonds, to ensure you choose the best ethical investment solution to meet your needs. Simply give us a call on 01322 907 000 or send us an email at firstname.lastname@example.org and one of our mortgage and protection consultants will arrange a no-obligation consultation for you with a qualified financial adviser.
Disclaimer: The information written above is intended as a guide to inform, educate and generate discussion. It is not to be used in place of specific and personalised advice from a qualified financial adviser. Investments can go down as well as up.