The number of self-employed people in the UK has been increasing since 2001, official figures show. Attractions of self-employment can include more varied work, more flexibility and being your own boss.
But these benefits be overshadowed by one big drawback: not having enough money to live comfortably in retirement?
Research has regularly found that the self-employed aren’t saving enough for retirement, if at all, and are saving less than employees.
For example, 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.
If you’re self-employed, how can you make sure that you’re saving enough for retirement?
How much to save
One rough rule is to take the age you plan to retire and halve it. Put this percentage of your pre-tax salary aside each year until you retire.
So, if you’re 30 you need to pay 15% of your income into a pension; if you’re 40 (20%) and 50 (25%).
If your income increases, save a higher proportion for your retirement.
To estimate how much money, you’ll need when you retire use the Money Advice Service’s pension calculator.
Martin Bamford, a chartered financial planner and chartered wealth manager, says that the self-employed should treat retirement planning as another budgeted expense and a cost associated with running your business.
You can pay a maximum of £40,000 each year into a pension and still get tax relief. This is called the “annual allowance”. If your savings go above this limit, you will usually pay tax.
You can carry forward any unused allowance for up to three years. This can be useful if your income fluctuates, Bamford says.
Picking a pension
Most self-employed people use a personal pension for their pension savings.
With a personal pension, you choose where you want your contributions to be invested from a range of funds offered by the provider.
The provider will claim tax relief at the basic rate of tax on your behalf and add it to your pension savings.
There are three types of personal pension: ordinary personal pensions which are offered by most large providers; stakeholder pensions where the maximum charge is capped at 1.5% and you can stop and start premiums without penalty and self-invested personal pensions which have a wider range of investment options, but usually higher charges.
How much you get back depends on how much is paid in, how well your savings perform, and charges you pay to your pension provider.
Self-employed people can also use NEST National Employment Savings Trust), which is a work pension scheme created by the government.
It’s run as a trust by the NEST Corporation which means there are no shareholders or owners and it’s run for the benefit of its members.
Although NEST is primarily for people who are employed, it allows some self-employed people to save with.
Use a Lifetime ISA
Pensions aren’t the only way to save for retirement. The under-forties can use the new Lifetime ISA, which is more flexible than a pension in terms of access to the money.
You can save up to £4,000 a year, and can continue to pay into it until you reach 50. After 60, you can withdraw the money without being charged.
To encourage people to use it, the government has said that it will give a bonus of 25% of the money you put in, up to a maximum of £1,000 a year.
Make the most of your state pension
For the current tax year 2017/2018 the new state pension is £159.55 per week – however you may get more than this if you have built up entitlement to additional state pension under the old system – or less than this if you were ‘contracted out’ of the additional state pension.
To be eligible for the full £159.55 per week you will need to have paid national insurance (NI) contributions for 35 years.
Since 6 April 2016, to get the full station pension of £159.55 per week, you need to have paid national insurance contributions for at least 35 years, says the Money Advice Service.
If you have fewer than 35 qualifying years, your pension entitlement will be lower.