You’re self-employed. You have to drum up business, attend high-calorie breakfast meetings, meet new clients, agree to fees, do the work, issue invoices, then somehow get paid. On top of that, you might be your own IT expert, human-resources person and even the office cleaner.
Where and when do you fit in sorting out a self-employed pension plan? What’s the best type to go for? And what do the experts say?
You’ve got lots on your plate. So sorting out that self-employed pension scheme might be something you put on the back burner. But at some point, you’re going to have to bring it to the boil and serve it up. Otherwise, you’ll be working right up until St Peter comes calling. That means no cruising the Adriatic or playing footsie with the grandkids.
It’s tough, isn’t it? We get it. The fact is, if you’re self-employed, you’re much less likely to have a pension plan. A recent report from The Pensions Advisory Service (TPAS) found that less than a third of self-employed people have a pension.
It was all so easy when you worked on PAYE, wasn’t it? Your pension contributions were deducted at source, and maybe your employer even matched your own contributions. In fact, under The Pensions Act 2008, auto-enrolment in an employer pension scheme is now a legal requirement. Dreamland, eh?
But fear not. We have all the self-employed pension guidance you need right here.
Okay, okay, you’re going to be entitled to a state pension. We know. For the current tax year (2018/2019), this would give you £164.35 a week.
That figure applies to men born on or after 6 April 1951 and women born on or after 6 April 1953. If you were born before that, you’ll be entitled to the basic state pension, which maxes out at a giddy £125.95 per week. This all assumes you’ve paid sufficient National Insurance Contributions (normally ten years’ worth).
If you’ve worked as an employee in the past, you could have accrued entitlement to additional state pension under the old system. That means you could be entitled to more. To assess the lie of the land, check out gov.uk’s state pension service.
But did we mention when state retirement kicks in? If you’re of a certain age, you might recall this threshold is 60 for women and 65 for men.
We’ve got news for you. These days, the age at which your state pension pot shows up in your bank account is an ever-receding horizon.
Since April 2010, the state pension retirement age has had radical surgery. The state pension age is currently 65 for men and is gradually increasing for women from 60 to 65.
There are more changes planned. From 2019, the age will increase for both men and women, to reach 66 by October 2020.
The government is planning further increases, which will raise the pension age from 66 to 67 between 2026 and 2028.
And then, you guessed it, it’ll hit 68 by 2037, seven years earlier than originally planned. That’s a move that pensions experts say will affect more than six million people.
Whenever it kicks in, £164.35 a week isn’t going to see you cruising off into the sunset.
Experts believe the best financial approach for most self-employed people is a mix of ISAs and pensions. These days, a lot of ISAs are instant access, which is perfect if your self-employed income is a little, er, up and down.
When you take out a pension scheme as a self-employed person, the government gives you tax relief on your self-employed pension contributions that matches how much income tax you pay. If you’re a basic-rate taxpayer, a £100 contribution will set you back just £80 of net pay.
That reduces to £60 if you’re a higher-rate taxpayer or £55 for additional-rate taxpayers. Growth is exempt from income tax and capital gains tax and, at age 55, you can cash in your contributions, with the first 25 percent being tax-free, too. Should you pass away before retirement, your pension will also be tax-free for your beneficiaries.
There are limits to the government’s generosity, though:
Pensions advisors reckon you can live comfortably on half to two-thirds of your current income. But the earlier you start saving, the better. Here’s why.
Getting money into your pension earlier gives you time to build your savings, more time to enjoy tax relief, and more time to allow your pot to grow. In fact, starting at age 30 could get you a pot that’s more than double that of someone who started at 50.
This chart assumes savings growth of 5% a year and annual charges of 0.75%.Your ContributionState ContributionStarting AgePot at 65£100£2530£70,000£100£2540£46,000£100£2550£25,000
The Money Advice Service offers a pension calculator that the self-employed can use.
You’ve got three types of self-employed pension scheme to pick from in the UK. The differences lie in the level of charges, flexibility and investment options open to you:
A personal pension plan is the most popular choice for most self-employed people. With a personal pension, you get to choose where your contributions are invested from a variety of funds that the provider offers.
The good news is that your pension provider will claim basic-rate tax relief and add it to your pension pot. The amount you get back depends on how much gets paid in, how well your investments do and how much you pay in charges.
Pensions experts believe that if you’re starting from scratch and can afford only a small monthly contribution, a stakeholder pension with a flat rate charge of around one percent is a good way to go. Pick a long-term, diversified, low-cost tracker.
Anyone wanting to go their own way might be interested in a SIPP. This is a low-cost DIY option. With a SIPP, you get to choose your own investments and manage your own pension fund. So you know precisely where your money gets invested and how much it’ll cost you.
With traditional personal pensions, you get a limited range of investment options based on a shortlist of funds operated by the pension company's fund managers. With a SIPP, you put your money wherever you like. This type of investing is known as execution-only. This means you get no advice from the host firm.
But with ultimate flexibility comes ultimate responsibility. You’ve really got to get investing to take out a SIPP. You’ll have to do research and spend a few hours here and there working on it.
Make a bad choice and the only one to blame is you. Frankly, if you’re not a closet financial guru, we suggest there are better options for a self-employed pension scheme.
So, those are the Three Musketeers of private pensions for the self-employed. But wait. There’s a D’Artagnan.
If you’re not keen on paying for tailored advice, or you don’t fancy yourself as the next Warren Buffet, you might want to look at the NEST scheme.
The scheme was introduced to dovetail with the government’s auto-enrolment programme. However, it’s a good self-employed pension plan as well.
The NEST Corporation runs the programme as a trust. So there are no sticky-fingered shareholders to worry about. It’s run for the benefit of its members.
Charges are favourable. For most savers, they’ll come in at about 0.5 percent. That’s a lot lower than with many stakeholder alternatives. You can go online to see your account and make changes, stop and resume payments when you like, and top up with direct debit or a debit card.
Pick from five funds to suit you, based around your risk profile and your religious and ethical beliefs.
But what if you suddenly decide self-employment isn’t for you? No trouble. You can still put money in your NEST pot as an employee. If you start working for an employer that’s signed up to the scheme, they can chip in, too.
Naturally, if you’d started a NEST account when you were an employee, you can carry on paying into your NEST pension scheme as a self-employed person.
But what if you employ people? If you’re self-employed and employ staff, you’ll be subject to the new employer pension duties. That means you might want to register with NEST as an employer. The NEST Corporation website has set out your options in its self-employed checklist (PDF).
If all this has left you even more befuddled than before, we suggest you get some help from a regulated financial advisor. They can offer recommendations that suit your individual circumstances.
This won’t usually cost you anything, as the advisor will take their fee from the appointed provider. You’ll also benefit from taking regulated financial advice by being protected if the financial provider goes bust or their pension product is unsuitable.
The main benefit, though, is that they can scour the entire market in an impartial way and make a recommendation that’s tailored around you.
You can find a regulated financial advisor with the Money Advice Service’s handy search tool.