How does a pension work for the self-employed?

By QuickBooks UK

2 min read

The way we work is changing. More of us than ever in the UK (4.8 million, or about 15% of the workforce) are self-employed, attracted by the freedom and satisfaction of being your own boss. Of course, being your own boss also comes with responsibilities, including finding new business and organising your own pension so you’ve enough money for a comfortable retirement.

Research has shown that many of the self-employed are either not saving enough for retirement or not saving at all.

The government’s Family Resource Survey, published in March, found that in 2015-2016, 62% of working-age adults employed as staff had pensions, compared to 17% for the self-employed.

“The self-employed often neglect their retirement planning, because they don’t have an employer providing a scheme,” says Martin Bamford, a chartered financial planner and chartered wealth manager. “In some cases, self-employed people believe they will keep working well into later life or treat the business as their pension. Both beliefs can be financially risky, as people are often forced into early retirement through ill health, needing to care for others or a lack of available work as they get older.”

Fortunately, the self-employed have more choice than ever when picking a pension.

Pick the right pension

A pension is basically a long-term savings plan with tax relief.

Your regular contributions are invested in financial markets so that they grow throughout your career and then provide you with an income in retirement.

Generally, you can access the money in your pot from the age of 55.

Self-employed people are entitled to the state pension and will receive an amount based on their national insurance contribution record, Bamford says. The new flat-rate state pension is £159.55 a week, although you might not get the full amount if you built up other additional statement entitlement earlier in your career.

Despite not being required by law to automatically enrol in a scheme, as employers are for their employees, the self-employed can still join the National Employment Savings Trust (NEST), a government body providing a pension scheme.

Self-employed people get the same tax relief on pension contributions as employees. Basic-rate income tax is added to any pension contributions and goes into the pension pot. For higher rate taxpayers, self-employed people can claim back the difference between higher rate and basic-rate tax on the value of their contribution.

For someone who is self-employed and starting to think about their retirement planning, Bamford advises them to consider saving for the future by using a range of funds, including pensions, ISAs (Individual Savings Accounts, where the interest or gains from stocks and shares is never taxed) and cash savings.

The most successful retirement income strategies we see usually have diverse sources of capital and income available, rather than relying solely on a pension pot, he says. “It’s better to save something than nothing, so getting started and keeping it simple is a smart approach.”

You can usually take up to a quarter of your savings as a tax-free lump sum.

The amount you’ll get when depends on factors including the amount you pay in, the fund’s investment performance and the choices you make at retirement.

 

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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