Self-Employed And Saving For A Pension
Approximately one seventh of the UK workforce is now classed as self-employed.
While the opportunity to break away from a boss and the usual corporate rules and earn a living your own way is the dream for many, a huge number of those working for themselves are not making provisions for their future.
The Pension Problem
Official figures have recently revealed that very few self-employed people are saving into a pension fund: 18% compared to 48% of traditionally employed workers.
By not contributing to their own private pension plan they are seriously limiting the amount of money they can expect to receive in retirement.
Since the introduction of the auto-enrolment workplace pension scheme in 2012, employers have been obliged to set-up and automatically enrol their employees into a workplace pension, providing contributions should the employee remain opted into the scheme and make their own monthly contribution.
The scheme is set to continue rolling out to workforces across the country (including those that employ just one worker) until late 2018, meaning more people will have pension savings for an annuity or to enter income drawdown in retirement.
So far the auto-enrolment system has been deemed a success, with around 90% of those enrolled opting to remain – many being younger workers who may not have given any consideration to a pension were they required to set up their own plan.
Herein lies the problem: self-employed people do not have anybody to set-up a workplace pension on their behalf, and they are not obliged to set one up by law under the new auto-enrolment scheme.
Positives vs. Negatives
For many self-employed workers, their income can fluctuate massively from month to month depending on the contracts they work and how long projects may take them.
So the thought of a regular monthly contribution into a private pension can be daunting. However it’s worth looking at the positives rather than just one negative.
- Pre-tax contributions – Your contributions will actually be taken from your pre-tax income (so will actually reduce the amount of income tax you pay).
- Tax relief – the government are rewarding those who contribute to a pension with 20% tax relief. Should you opt to contribute £100 per month, the government will contribute £20 of this, so you’ll only end up contributing £80 of your own money (this drops to £60 as a higher rate tax payer, or £55 as an additional rate tax payer).
- Tax-free 25% – When you decide to retire, or even when you just reach ‘retirement age’ you are able to take 25% of your pension savings completely free of income tax. The rest of your withdrawals will be taxed at your marginal income tax rate.
- Beneficiary’s benefits – While it may not be something you want to think about, should you have a pension fund and you die before the age of 75 your beneficiaries will inherit it free of tax.
Because being self-employed can be quite an unstable work choice, remember that pensions aren’t your only option for saving for retirement. An ISA can really be taken advantage of due to its tax-free wrappers, so if you have a really great year of earnings you can top it up to £15,240 and earn tax-free interest.
Save Early, Save Often
Many of us have aspirations for when we retire, whether that’s going to live in an exotic country for our remaining years, travel world, or just spend our time enjoying the company of friends.
Unfortunately, many underestimate the cost of this, or at least overestimate just how much the state pension actually supports retirees in the UK.
With full national insurance record, retirees can expect to receive close to £8,000 per year from the state pension. Financial advisors usually advise that a healthy sum to live on in retirement is between half and two-thirds of your working income.
If this is what you’re hoping for, whether you’re looking to choose an annuity product or enter income drawdown, then it’s important to get saving as early as possible.
To set up a private pension it’s always worth speaking with an independent financial advisor or your business accountant first. They will be best placed to explain your options, and explain the difference between personal pensions, stakeholder pensions and self-invested personal pensions (SIPPs).
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