Pension saving for the self-employed

by | Oct 13, 2021 | Business

When you’re self-employed, you get to enjoy the freedom of being your own boss, setting your own rules and shaping your business the way you want to – but those benefits also come with new challenges and responsibilities.

One of those is saving for your pension. While employees are automatically enrolled into a workplace pension scheme if they meet certain age and earnings requirements, and receive employer contributions alongside their own savings, no such scheme currently exists if you work for yourself.

It’s up to you to set some money aside for the future, and the sooner you start doing this, the better.

Why do you need a pension?

The idea of stowing your money somewhere you can’t touch it for several years doesn’t sit right with a lot of self-employed people. After all, why not invest that money back into the business or add it to a rainy-day fund?

While you do need to make sure you have access to cash in case of emergencies, the fact is that most people also need to begin pension saving as early as possible if they want to enjoy a comfortable lifestyle when they retire.

A 2021 survey by Which? found that a single person would need to spend £13,000 a year on average to cover the essentials in retirement.

That rose to £19,000 for those living comfortably, with extra expenses including European travel, charity donations and leisure activities. For a more luxurious lifestyle that included long-haul holidays, new cars and expensive meals, the cost came to £31,000 a year.

Relying on the state pension alone to cover those costs is unfortunately not an option, with the new full basic state pension standing at £9,339.20 a year in 2021/22.

But even if holidays and luxuries don’t feature in your retirement plans, there’s another good reason to save into a pension – tax relief.

You can get tax relief on private pension contributions worth up to 100% of your earnings each year, up to an annual allowance which stands at £40,000 in the 2021/22 tax year, and a lifetime allowance which is currently £1,073,100.

The relief is given automatically if you pay income tax at the basic rate of 20%, but if you pay at the 40% or 45% rates you can claim it through your self-assessment tax return.

And the good news is, since pension freedoms rules were introduced back in 2015, you can withdraw up to 25% of your pension savings tax-free from the age of 55, although this will rise to 57 in 2028.

This means you don’t necessarily have to wait until your retirement age to tap into your savings, and can opt for more flexible arrangements like gradually reducing your working hours later in life.

Self-employed pension options

To save for retirement when you’re self-employed, you’ll usually need to set up a personal pension.

These come in three main forms: standard personal pensions, self-invested personal pensions (SIPPs), and stakeholder pensions.

  • Standard personal pensions allow you to choose funds from a selection offered by your provider, and make regular or one-off contributions.
  • Self-employed personal pensions (SIPP) give you a wide range of investment options, with thousands of funds and equities to choose from. You can start and stop contributions to a SIPP as you choose, without any charges or penalties.
  • Stakeholder pensions were once a popular option among the self-employed but have fallen out of favour in recent years due to restrictive policy terms and the emergence of more flexible options.

You can find out more about personal pensions on the Government’s MoneyHelper website, or talk to a professional adviser about your options.

Whatever you choose, your plan for saving and accessing your money in retirement should also tie in with the rest of your personal tax strategy, including inheritance tax and estate planning, as well as your business exit plan.

Contact us for advice on your pension savings.

Ready to start the journey?

To get help with your accounts and start freeing up your time to focus on growth, talk to the Mayflower team today.

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