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Pensions for the self-employed – what you need to know

If you’re one of the 4.6 million self-employed workers in the UK – be that as a skilled tradesman like a plumber or joiner, or a freelance writer or consultant – it’s unlikely that you’ll have someone to rely on to take care of your retirement planning. When thinking about getting ready for retirement and pensions, here’s what you may need to consider.

Make your own pension arrangements

Research from the Money Advice Service has found that over half of self employed men (53%) and two-thirds of self-employed women (67%) have no pension savings other than the State Pension, so it’s important to take matters into your own hands.

Think about how you want to fund your retirement – is that via a traditional pension fund or maybe through building up a property portfolio, or by putting money into ISAs? If you’re saving for retirement via a traditional pension fund, then do you know how to set one up? A financial adviser can set up a private pension plan for you, usually via an insurer. You might also consider joining NEST, the not-for-profit pension scheme set up by Government.

However, you should remember that as a self-employed pension saver, you won’t be eligible for employer contributions. As many employers offer pension contributions that match or beat what their members pay in, you could really lose out in comparison.

How much to pay in

The general rule with pension contributions is to pay in as much as you can afford and to start early. For example, if you started paying £150 a month into your pension when you were 20 and retired at 65, assuming your fund grew by an average of 5% a year, it would be worth almost £300,000.

Start paying in the same £150 a month from age 40 and assuming the fund will grow at the same 5% a year, would give you a pension pot of just under £90,000. Delay until you’re 60 and your pot would be worth just over £10,000.

Pensions also offer tax advantages when compared to saving in a high street or online savings account. Despite the fact that you won’t get an employer contribution to top up what you put in, you will get the advantages of tax relief.

If you’re a basic rate taxpayer (i.e. you earn up to £31,865 a year) you can get an extra 20% added to your pension contributions. This will be either claimed by your pension provider, or you will have to claim it back in your annual Self Assessment tax return.

For earnings in the tax band of £31,866 to £150,000, you will be able to claim tax relief at the Higher rate of 40%, while if you earn over £150,000 you can claim tax relief at the Additional rate of 45%. To claim these rates of tax relief, you will get 20% at source, with the rest claimed via a Self Assessment tax return.

National Insurance and the State Pension

Will you be entitled to the full State Pension? For many people, the State Pension will be either their sole or main source of income in later life.

How much State Pension you receive depends on what National Insurance Contributions (NICs) you have made throughout working life – self-employed people earning more than £5,885 a year normally have to pay Class 2 NICs and depending on your earnings, you may have to pay a proportion of your profit as Class 4 NICs. For more information about NICs rates and how to pay, see the Government’s website.

From 2016, the government is introducing a New State Pension that will be worth at least £148 a week, provided you have at least 35 years’ NICs records – up from 30 years at present. Not sure how many years NICs you have? You can check online by requesting a NICs record statement from the Government.

If you have a shortfall, you may also be able to make voluntary NICs top-ups.

Sell your business

In many cases, the main asset of your business will be yourself, and often your business will come to a natural end when you retire. But in some cases, your own business could be a valuable asset that you may be able to use to fund your retirement. For example, if you employ other people, or have business premises that you own, your company may be able to carry on without you.

Options include selling the business outright and taking the cash, or passing down the business to another generation or part selling it, while remaining the owner and drawing a dividend. You may also be able to continue working, by cutting down hours in the run up to retirement, or take on an advisory/consultancy role.

Review your Savings and Investments

Don’t overlook any other savings and investments you may have, as these could be useful assets in retirement. Speak to a financial adviser to make sure that your money is working hard enough for what you want it to do.

Here are some questions you might ask your financial adviser.

Are you self employed? How do you intend to fund your retirement? Please feel free to share your plans with us in the comments below.  

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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