PensionsPersonal Finance

How To Plan For Retirement When You’re Self-employed

Female entrepreneur using a laptop in her framing shop

Working for yourself is the ultimate dream for many. Being your own boss, choosing your own hours, making your own business decision, not having to contend with office politics – there are a lot of reasons why people decide to set up on their own.

According to the Office for National Statistics (ONS), there were over 5 million registered self-employed people in the UK at the end of 2019, representing 15.3% of the employment market, up from 3.2 million (or 12%) in 2000. The fastest growth in self-employment is occurring in the over 45s.

However, what some call the new age of self-employment comes with its own set of obligations, and planning for your retirement is certainly one of those. And while the government stipulates employer duties for automatic enrolment and workplace pension schemes for their staff, there are no equivalent provisions for sole traders and other registered self-employed people. The result is the stark reality that only a third of self-employed people have any pensions provision set up, while over 80% of employees are eligible for a workplace pension.

Do you really need a pension?

No-one is disputing the fact that you have to fund your retirement somehow, but does it have to be with a pension? Retirement income can be generated in many different ways including using property assets and many long-term savings and investment vehicles.

The fact remains that a pension is purpose-made for the job, and the tax benefits available with a pension make this way of saving an attractive proposition. Tax relief is available at the highest rate you pay, meaning every £100 in your pensions pot includes £20 from the government. Higher rate taxpayers can claim back even more tax relief through their self-assessment tax return. You can put in up to £40,000 a year, subject to earnings.

Choosing a personal pension can be a daunting task, and you should speak to an independent financial adviser who specialises in pensions and can guide you towards the best product for your personal needs. 

How much should you put in?

According to current figures, the maximum state pension is just over £9,000 per year once you’ve reached the statutory retirement age, which is currently 65 years for men and women, but is set to rise. The government suggests that you will need at least half of your pre-retirement salary to live on in your old age, meaning your state pension will need to be topped up with other retirement fund income.

To find out your likely retirement income based on your current provisions, there’s a handy pension calculator here. It’s a good way to find out where you are, and whether you should tweak your monthly contributions.

Here are some tips to help you manage your budget when it comes to retirement planning:

  • The earlier you start saving for retirement, the less you need to put away every month to secure a comfortable retirement in due course and the more time your pension pot has to grow. On the flip side, the later you start, the higher the monthly amount you have to save. 
  • You can start your pensions pot off with a lump sum payment, but after that you should make regular monthly contributions. Paying in what you can afford every month to save for the future is a healthy financial habit to cultivate.
  • Review your monthly payments periodically and increase them when the situation allows. Whether you’ve landed a big client or business has steadily grown, make sure you put some of it into your pension.
  • Have a clear goal of where you would like to be financially when you retire. While this can be tricky to visualise while you’re relatively young, having a picture in your head of what a comfortable retirement means to you can be very motivating. 
  • Review your retirement plan at least once a year and ideally every 6 months to see whether you are on track. Investment performance can vary, meaning your pension may grow at different rates. Stay flexible and alert, so changes can be made whenever necessary.

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