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

Being your own boss has its advantages, but are you short-changing your retirement prospects?

If you’re one of the 4.8 million self-employed workers in the UK – be that as a skilled tradesman like a plumber or joiner, or a freelance writer or consultant – have you thought about your plans for retirement?

Research from Aegon, a pensions and insurance company, found that over half (52%) of the UK’s self-employed don’t have a plan for retirement, while three quarters (75%) aren’t saving regularly for later life. But with the State Pension age rising, it’s important to take matters into your own hands if you don’t want to be working well into old age.

The general line on saving for a pension is for people to start saving as early as possible and save as much as they can within the available allowances, says Mark Butterworth, head of technical services at Skipton Financial Advisers.

“For many people there is an element of burying their head in the sand when it comes to their retirement planning. They probably know that their savings aren’t adequate for what they need, but don’t want to face dealing with the bad news.

“Understandably for a lot of self-employed people – with so many priorities to juggle – setting up and paying into a pension may have been overlooked. There are significant tax advantages available in saving up via a pension so if you are still years away from retiring, it might be time to address any lack of pension provisions by arranging one now.”

If you’re self-employed and need help planning your financial future, Skipton Building Society can help you to think about what you want to achieve in retirement. Our financial advisers will review your plans – including your pension – and explore options for growing your savings and investments. If there’s a gap between your expectations and finances, we’ll advise you of the options that could address it.

Our recommendations are likely to include stock market-linked investments. These aren’t like building society savings accounts, as your capital is at risk and you may get back less than you invest. The value of your investments and any income from them may fall as well as rise.

You shouldn’t rely on the State Pension

How much State Pension you receive depends on what National Insurance Contributions (NICs) you have made throughout working life. Self-employed people making a profit of more than £6,025 a year normally have to pay Class 2 NICs.

Depending on your earnings, you may also 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.

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The State Pension is worth £159.55 a week in 2017/18, but you need to have at least 35 years’ NICs records to receive the full amount. If you’re 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.

But the State Pension age is rising. At present, the State Pension Age is 65 for men. For women, it will reach 65 by November 2018 and then 66 for both by 2020, then 67 by October 2028.

In July 2017, the government announced plans to raise the State Pension age to 68 between 2037 and 2039, affecting those born between April 1970 and April 1978.

The State Pension can be a valuable part of your retirement income, but if you don’t want to be reliant on it – and have to wait until your mid-to-late 60s to retire – you should put your own plan in place.

Tax relief can make a big difference

When it comes to financial planning, the self-employed are often left to their own devices. What’s more, irregular earning patterns can mean it is difficult to commit to saving on a regular basis.

Self-employed people often need to keep their finances flexible in order to cater for any temporary downturns in their income. As a result, they may be more likely to have cash savings and ISAs that mean they can access their money whenever they want.

Pensions shouldn’t be ignored, but you should remember that as a self-employed person saving for retirement, you won’t be eligible for employer contributions. As many employers offer pension contributions that match those made by their employees, this could represent a considerable amount.

The government is currently reviewing auto-enrolment into pensions, the policy that sees workers automatically entered into saving for a pension when they meet certain work or earnings requirements. As part of this, the review will consider how the growing numbers of self-employed people can be helped to save for their retirement.

Yet pensions also offer tax advantages when compared to saving in a high street or online savings accounts through tax relief.

If you’re a basic rate taxpayer (i.e. you earn up to £45,000 a year) tax relief means you can get the income tax you would have paid (20%) added to your pension contributions. This means a £100 pension contribution only ‘costs’ you £80, with the remainder topped by the government, and another 20% or 25% available for higher and additional rate taxpayers, depending on your rate of income tax.

You can pay a maximum of £40,000 a year into a pension without paying tax on your contributions – known as the annual allowance – although you can normally combine any unused annual allowance from the three previous years. This may be a consideration if you’ve had a bumper year and want to boost your pension pot.

It’s worth noting that your allowance will be less if you earn more than £150,000. The annual allowance will be reduced by £1 for every £2 of income over £150,000, with a maximum reduction of £30,000. This means anyone with income of £210,000 or more will have an annual allowance of £10,000.

If you have accessed your money purchase pension savings, also known as defined contribution pension, under the pension freedoms rules, you’ll also have a money purchase annual allowance (MPAA) that means you can pay in a maximum of £4,000 a year into your DC pension. The rules also mean you cannot use previous years’ annual allowances to make DC pension contributions in excess of the MPAA.

Consider taking out a private pension

As self-employed workers are missing out on a workplace pension, they may want to consider taking out a personal pension, offered by pension and insurance companies.

While you should be mindful of charges, it’s important not to opt for the cheapest fund purely on the basis of low fees, as there are other factors, such as the investment strategy, the manager’s skills, fund governance and the pension provider’s ability to weather adverse financial conditions that should all play a part in choosing a private pension.

It may be worth seeking the support of a professional financial adviser to help you make the best decision for you both in terms of provider and the amount you can contribute.

Our recommendations are likely to include stock market-linked investments. These aren’t like building society savings accounts, as your capital is at risk and you may get back less than you invest. The value of your investments and any income from them may fall as well as rise.

Retiresavvy is brought to you by Skipton Building Society.

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