Self Employed and Retirement

Key takeaways:

  • A state pension alone is unlikely to be sufficient to fund your retirement.
  • Make your money go further by taking advantage of the tax relief available on your pension savings.
  • There are a lot of factors to take into account when choosing a pension, so it makes sense to get professional advice.
  • HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen.
  • The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
There are 4.8 million self-employed people in the UK and only a third have any kind of pension arrangement. A shocking statistic when you consider that State support is shrinking and we’re all living longer.

Of course, saving for a pension when you’re self-employed is not as straightforward as it is for an employed person, who might automatically benefit from a workplace scheme and employer contributions. We’ve outlined some key points below for you to consider:

Don’t rely on the state pension

Whether you’re employed or self-employed you’re entitled to the full basic State Pension (currently £141.85 a week) if you’ve paid in 30 years of National Insurance Contributions.

If you’re self-employed you can only claim the additional State Pension if you’ve had periods of employment.

On its own then, State support is unlikely to enable you to continue your current standard of living into retirement. That’s why it’s imperative for the self-employed to find other ways to provide the additional income needed in retirement.

Start Saving Early

One of the main benefits of paying into a pension is the tax relief the savings attract. If you want to make a pension contribution of £100 a month, this will only cost you £80 a month, as HMRC will add an extra 20% in tax relief. HMRC will contribute to your pension the amount you would have paid in income tax on £100 gross earnings. Higher and additional rate taxpayers can claim higher rates of relief via their annual tax return.

The maximum amount you can save each year that attracts tax relief (otherwise known as the annual allowance) is £40,000.

Importantly, if your income is low and you’re not able to save the full £40,000 in one tax year, you can carry forward any unused allowance, and use it against earnings in the next tax year. Please note:

  • You must have been a member of a registered pension scheme during the years you want to carry forward
  • Your tax relief is limited by your annual earnings in the year you want to carry forward
  • You can only carry forward unused allowance from the three previous tax years

What type of pension is right

The self-employed can choose from a range of different pension products, including stakeholder pensions, personal pensions and Self Invested Personal Pensions (SIPPs). Each has its advantages and disadvantages – we can advise on which is best for you.

Perhaps the most flexible pensions are stakeholder schemes. They allow you to save as little as £20 per month and the charges are relatively low, which is helpful if you have irregular income levels.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.