The self-employed workforce is growing exponentially, as more chose the flexibility and benefits of swapping the 9 to 5 office day for being their own boss.
Self-employed workers now make up 15% of the British workforce, having increased to around 4.8 million in 2017, according to figures from ONS.
While there are many benefits to self-employment, including choosing your hours, projects and clients, there are some downsides. These include a lack of holiday pay, sick pay and pensions for self employed.
But That’s Not All
Just short of half of all self-employed workers between 35 and 55 have no private pension for self-employed, according to government data. This is most likely because the self-employed are no offer the benefits of auto-enrolment available to those employed by a company. This benefit allows employees to sign up for a workplace pension, in which both they and their employer contribute. But the self-employed are missing out – with a price tag of hundreds of thousands of pounds during their working lives.
If the self-employed continue to be excluded from the government’s auto-enrolment reforms, those self-employed without pension savings could exacerbate the UK Pensions Crisis and find themselves with a retirement shortfall once they stop working.
However, there are some tricks to ensure you’re prepared for retirement. Try these 7 tips for your pension when self-employed.
Do the Maths
The first thing to do is to work out how much you have, and how much you’re going to need. The average person needs around 70% of their current income to retire comfortably. However, this amount depends on your circumstances and the lifestyle you’d like to maintain once retired.
Did You Know?
When deciding how much pay into your pension savings, think about what you can afford to put away each month, how much time you have until your retirement and your planned retirement income. Making use of an online pension calculator can help you figure out what you need to contribute each month.
Start Saving as Soon as Possible
The sooner you start your retirement fund, the more money you’ll have in it when you reach retirement age. The earlier you start saving, the more growth your fund will experience. You’ll also earn more compound interest if you leave your savings untouched for a few decades, turning a small pension to a significant savings pot by retirement age.
The later you start your retirement savings, the higher your contributions will need to be to match the amount you need to save.
Make the Most of Tax Relief
The government offer tax reliefs programmes to encourage pension savings. If you save up to £40,000 into your pension, you can receive tax relief on your savings. Basic rate taxpayers are eligible for a 25% tax top-up. This means that for every £10 you pay into your savings; you’ll get £2.50 from the government. If you contribute a higher tax rate, you could claim even more tax relief.
Limited Companies Get Further Tax Breaks
If you own or are the director of a limited company, you can pay employer contributions to your pension. Pension contributions from a limited company are considered allowable business expenses, and this means you’ll be able to reduce your corporation tax bill. You can also save additional tax by having your company pay into your pension, as it won’t pay National Insurance on the contributions.
Track Down Your Old Pensions
You may have worked for an employer previously, which means you could have some old workplace pensions. To track down these pensions, you can make use of the Pension Tracing Service1 to find your pension with the name of your pension provider or former employer. You could also contact your old employer for assistance.
Consolidate Your Savings
It might work in your favour to consolidate your pensions into one fund, which will allow you to stay abreast of how your investments are doing. Putting all your pension savings into one pot can also protect your smaller pots from being swallowed up by high fees.
There are options for you to choose from when consolidating your funds. You can take out a personal pension, which will let you make contributions regularly or on an ad-hoc basis, and this will allow you to build a fund based on how much you have saved and earned interest. You could also invest the funds in a self-invested personal pension (SIPP), which will give you access to a range of investment options. A third option is a stakeholder pension scheme, which has a minimum gross contribution and capped fees for the first 10 years.
Familiarise Yourself with Your State Pension
While it may not be enough for you to retire comfortably on, your state pension could bolster your pension savings. This is especially important with the rising life expectancy and increasing the state pension age. To be eligible for the state pension, you need to pay at least 10 years of National Insurance Contributions, and to receive the full state pension, you will have to contribute for 35 years.
Ensure your contributions are up to date by checking your National Insurance record with the online State Pension checker2.
Got Questions? Check These First
How Can I Increase My Pension Savings if I'm Self-Employed?
To make sure you’re getting the most pension savings possible when self-employed, ensure you are taking advantage of tax relief programmes offered by the government. You can also increase your monthly contributions, or deposit lump sums whenever you have a windfall, to keep your pension pot growing.
How Can I Get Employer Pension Contributions When Self-Employed?
If you are the owner or director of a limited company, your limited company can pay employer contributions to your pension. Pension contributions from a limited company are allowable business expenses, and this will allow you to reduce your corporation tax bill.
Why is a SIPP suitable for Self-Employed People?
Consolidating your funds into one pension fund can allow you to keep a closer eye on your funds. While there are many types of pension plans, many self-employed people choose a self-invested personal pension (SIPP) to hold their investments until retirement. The key feature of a SIPP is that you have more flexibility with the investments you can choose.
Should I Save a Pension if I'm Self-Employed?
Even if you’re self-employed, it’s important to plan for your future and invest in a pension plan. Your pension savings provide you with an income once you retire. These funds can either boost your income or cover unforeseen costs. Pension schemes also give you additional benefits, such as tax relief.
Being self-employed can be challenging, but there is no reason to neglect your future. Ensure you can retire after many years of hard work by saving into your pension pot now.