Self Employed
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?
Getting a pension when self-employed
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.
Why you need a self-employed pension plan
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.
New state retirement age
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.
Why the self-employed should save into a pension
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:
- There’s a cap on the tax relief on your private pension contributions at 100 percent of your annual earnings
- You’re usually restricted to annual contributions of £40,000 into your pension pot. This is your annual allowance
How much should you save?
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.
