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On your own – pensions for the self-employed

One in seven of the UK work force is self-employed, according to official figures from the Office for National Statistics. Yet it seems that few are able - or willing - to plan for retirement,  as just under a fifth of self-employed workers contribute to a pension, compared to half of employees.

With a complete National Insurance record, you can expect to receive a basic state pension close to £6,000 a year when you retire – rising to around £8,000 a year in the future, under reforms due to come into effect in 2016. But you are likely to need far more to have a comfortable standard of living in old age – and for many people, this means paying into a pension of your own.

Pay and contributions – a double whammy

Yet 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.Line drawing of person sat at desk

In fact, according to a report by the Resolution Foundation in January, a think tank, while weekly wages for employees have fallen 6% since 2007, self-employed pay has tumbled by more than a fifth over the same period. But worryingly, it is those aged 35 to 50 – who you would expect to be at their peak earnings power –who have experienced the biggest fall in earnings, and it can have long-term effects on retirement planning.

“Self employed people often need to keep their finances flexible in order to cater for any downturns in their income,” says Patrick Connolly, a certified financial planner at advisers Chase de Vere. “As a result, they may be more likely to have cash savings and less likely to lock money away for extended periods unless they are fully confident they can afford to do so.”

Self-employed workers do not receive employer contributions – the effect of which should not be underestimated. Many employers make generous contributions to pension funds –often matching employer contributions or better - while companies with what’s known as a salary sacrifice scheme may also add the National Insurance that they have saved to their employees’ pension pots.

Steps you can take

But what do self-employed workers have to do in order to be properly prepared for old age?

Many self-employed people might want to consider a combination of pensions and ISAs when planning for old age, says Patrick. “Self employed and part-time workers, especially those with irregular earnings, might favour the added flexibility of ISAs, meaning they can access their money whenever they want, however, pensions shouldn’t be ignored.”

Pensions benefit from initial tax relief. This adds 25% to the value of your contributions for basic rate taxpayers, and is particularly attractive for higher rate taxpayers, who receive 45% tax relief. Making contributions can also bring people down below certain tax thresholds or retain eligibility for child benefit, which may help with tax planning.

However, when it comes to personal pensions, there can be pitfalls in the way of hefty charges points out Nick Hungerford of online investment managers, Nutmeg.

“Make sure you understand the charges and that these are clear and upfront,” he says. “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.”

How much is enough?

The general line on saving for a pension is to start saving as early as possible and save as much as they can, says Mark Butterworth, head of technical services at Skipton Financial Services Limited (SFS).

“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. Although most self-employed people have the disadvantage of no employer making additional contributions into their pension, you can still benefit from income tax relief.”

Experts suggest that a good rule of thumb for the self-employed is to aim to save up to 20% of earnings, especially as they won't benefit from any employer contributions. The challenge then is to review the pension regularly so you have an idea what it will provide for you in retirement and to increase contributions as your earnings hopefully increase over time.

Are you self-employed? How are you planning for retirement? Let us know below or head to the Forum

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

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