How to start a pension if you’re self employed
If you’re dealing with the day-to-day challenges of building a business, it’s natural that saving for retirement can become an afterthought.
If you’re dealing with the day-to-day challenges of building a business (over 4 million people in the UK are self-employed), it’s natural that saving for retirement can become an afterthought.
Research shows that just 31% of self-employed people pay into a pension - and that’s leading to many becoming seriously concerned about their retirement. 1
So, where do you start and what do you need to think about when it comes to saving for retirement?
The State Pension isn’t a crutch
If you retire with just the State Pension as your primary form of income, it could be akin to climbing a mountain with your leg in a plaster cast. After all, a weekly income of £221.20 might leave you scrambling.
But the State Pension is excellent as a supplement to a private pension.
To receive it, you’ll need:
- At least 10 years of qualifying National Insurance contributions to get any State
Pension at all, or… - At least 35 years of qualifying National Insurance contributions to get the full State
Pension
If you’ve ever worked as an employee or been in receipt of National Insurance credits, you might have built some entitlement to the State Pension.
You can actually check how much State Pension you’re likely to receive by looking at your State Pension forecast. You’ll be able to see how you could increase it too, if it’s lower than the maximum.
Contributions are on you
In 2012, the coalition government introduced automatic enrolment, which made it a legal requirement for employers to enrol their eligible employees into a workplace pension scheme. It made saving for retirement, well, automatic.
But there are no such rules for the self-employed. It’s completely up to you to open a pension and save enough for your retirement.
Whilst it’s easy to assume that a personal pension is not as lucrative as a workplace one – after all, you don’t get employer contributions if you don’t have an employer – you’ll still benefit from tax relief on the money you save into the pension. That means saving for retirement might not cost quite as much as you think.
In fact, you’ll generally receive tax relief on your contributions up to your annual earnings or £60,000. Whichever is lower.
In other words, if you’re a basic-rate taxpayer, for ever £100 you save into your pension, the government will contribute £25.
And if you pay 40% income tax, then you can claim back a further £25 through tax relief for every £100 contributed to your pension. That’s in England, Wales and Northern Ireland.
In Scotland, it works a little differently. If you live north of the border, then you can claim an extra £1.25 for every £100 paid into your pension if you’re under the Scottish Intermediate Rate of 21% income tax. If you pay 41% income tax as part of the Scottish Higher Rate, you’ll be able to claim back a further £26.25.
1 How to solve the self-employed pensions crisis | IPSE
Schemes
As a self-employed person, you have the freedom to choose the pension and the pension provider you want. Most people opt for a personal pension - some people call it a private pension.
With this type of pension you can choose how you want your savings invested based on a range of funds offered by the pension provider. The provider claims basic-rate tax relief on your behalf automatically, and it’s added to your savings. That means one less thing you need to think about.
There are three main kinds of personal pension:
- Ordinary personal pension.
- A Stakeholder pension, which is basically a type of pension that works flexibly. It’s subject to a cap on charges, and has a default investment strategy, making your investments easier to manage.
- Self-invested personal pensions (SIPPs), which offer much wider and varied investment opportunities than other kinds of pensions. Possible investments include investment trusts, company shares, collective investments, and property. Different providers offer different choices, though.
Another option is a Nest pension. It’s a sort of workplace pension scheme that was set up by the government, and is used by some self-employed people to save for the future. Or if you were previously enrolled in a workplace pension, you may be able to continue contributing to that pension.
To read more about how to start a pension, head to MoneyHelper.
The Annual Allowance
Now, whilst you can save as much as you’d like to towards your pension every year, there’s something to be aware of.
It’s called the Annual Allowance, and it kicks in at either £60,000 worth of pension savings, or your annual income. Whichever is lower.
If you’re a higher earner, you’ll need to know about the ‘tapered annual allowance’. Effectively, this means that your annual allowance limit could be reduced to as little as £10,000.
For more information, check out MoneyHelper’s guidance here.
Your future self will thank you
It’s good to be thinking about your future, and whilst it’s unfortunate that so many self- employed people are worried about their retirement, it just takes a little planning to really make a difference.
Doing your research and knowing what kind of pension will serve your future the best is important, so take your time. Comparing what’s offered by different providers might highlight some unpleasant charges you weren’t aware of, or even an investment strategy that aligns with your personal morals or ethics.
Remember, too, that ISAs and Lifetime ISAs are sometimes used as a ‘pension substitute’. If you have one of these, it might be worth considering whether you could use it as a pension.
Starting to save earlier in life pays, too. So don’t hang about.
Get that pension set up, set up your contributions based on what you can afford, and give that retirement you’re dreaming about a little bit more reality.
MoneyHelper has a free information helpline for the self-employed. You can call them on 0345 602 7021 (Mon-Fri, 9am-5pm) and one of their pension specialists will be happy to answer your questions.