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The complete guide to self-employed pensions
by
Checkatrade

self-employed pensionMany people, even those with great job satisfaction, dream of the day they can finally retire from work. With visions of long walks, lazy mornings and exploring the world, retirement is a chance to slow down and enjoy your old age. The only spanner in the works is how you plan to fund your retirement. In fact, the best way to do this is through a self-employed pension.

So, if you’ve made the move to starting your own business, or you can now afford to put some money away, you won’t regret starting a self-employed pension. In this article we’ll help you navigate the world of pensions for the self-employed.

Keep reading to learn about tax relief, contributions, state pensions and so much more.

What is a pension for the self-employed?

A pension is really just a long-term savings scheme, where the money you put aside now will hopefully grow for your future. This is especially important as you’ll no longer be receiving a wage.

Unlike being employed, being self-employed means you’ll have no workplace pension to fall back on from an employer. As such, it’s up to you to save for your future and investing in a self-employed pension fund is a wise decision.

Unfortunately, you won’t be automatically signed up for a workplace pension which means you’ll need to start your own pension fund. However, it isn’t all bad news. You’ll have the freedom to choose any pension fund you want. This means you’ve greater control over your money and how it’s invested.

Having a self-employed pension will give you security when you retire, plus depending on where you invest, you’ll accrue interest to further increase your savings pot. You can also reap a range of tax benefits when choosing to start a pension (more on this later).

Remember, you may be retired for over 30 years, so saving a little now will mean excellent rewards after you reach retirement age. So, for a carefree retirement with the funds to live out your dreams, start saving as soon as possible.

What are private pensions for self-employed people?

Different from state pensions (more on this later), private pensions for self-employed people are set up and paid into by individuals. Once you retire, you’ll receive your private pension in addition to your state pension, which together should mean you’re comfortable money wise.

What’s more, the younger you are when you start investing, the more funds you’ll save. This means you’ll have a higher income during retirement, allowing you to complete your bucket list.

As we mentioned before, private pensions for self-employed people are completely in your control. You decide how much, where and when to invest.

self-employed pension schemeWhat are self-employed state pensions?

Self-employed state pensions are very different to private pensions. The main difference is that the government funds your self-employed state pension and you fund your private pension. Many people search for ‘do self-employed workers get a state pension’ and the answer is that it depends.

In order to receive a state pension, you’ll need to have made National Insurance contributions throughout your life. As long as you’ve made regular contributions, you’ll be eligible to receive your state pension once you reach a pre-set age (determined by the government).

Unfortunately, the state pension is not high enough to fund the lifestyle most people enjoy when they’re working. This means having a private pension is essential if you want to live well. If you’re unsure about whether you’ll receive a state pension or want to check the amount you’re predicted to get, please visit the GOV.uk check state pension page.

What are self-employed pension contributions?

Once you’ve started a private pension, you’ll need to make regular contributions. But what are self-employed pension contributions? These are regular amounts that you voluntarily pay into your pension fund. You can set the amount you pay and it’s often simpler to set up a monthly direct debit for the contributions you wish to make.

If you’re unsure about how much to contribute to your private pension, consider the following:

  • Age: The older you are, the less time you have to build up your pension. This means you’ll need to make higher contributions than a younger person would to receive the same amount at retirement.
  • Lifestyle: If you want to enjoy a lavish lifestyle after retirement, you’ll need to pay in more money to your pension fund.
  • Family: If you’re planning to support different family members after your retirement, you’ll need to pay more than if you just need to support yourself.

What are the pension options for self-employed people?

Let’s look a little deeper into the pension options for self-employed people. You may feel like the state pension is enough for you to live off, however, if you want to feel secure financially, a private pension may be the best option for you.

When it comes to private/personal pensions, you have four different options. These are ordinary, stakeholder, self-invested and NEST pension. Below, we have summarised these choices:

  • Ordinary: Most personal pensions fall into this category, where you make voluntary contributions that will be paid out after you retire.
  • Stakeholder: Different from ordinary pensions, stakeholder personal pensions have a maximum charge of 1.5%. You can also choose to stop paying into your pension and restart at any time, without having to pay a penalty. You’ll need to meet a range of different standards that are decided by the government and your money will be mostly invested in stocks and shares.
  • Self-invested: Self invested personal pensions or SIPPs give you better control over where your money is invested. They allow you to have a more hands on approach to your pension, although you may incur higher charges.
  • NEST: Finally, you can also choose to start a NEST (nation employment savings trust) pension. Here, your funds are invested with the NEST Corporation that is run with its members needs in mind. You can check your eligibility for a NEST pension online.

Save money for home cost conceptWhat is SIPP tax relief?

As we briefly discussed, SIPPs give you better control of your savings. You can choose where to invest and manage your pension yourself. If you do choose to use an SIPP, you may be eligible for tax relief.

But what is SIPP tax relief? Well, this is where the government tops up your pension contributions by 20%. This helps you build up your SIPP for retirement. For example, if you contribute £2,000 in a year to your SIPP, the government will add an extra £400 through tax relief.

Are pension contributions tax deductible for self-employed people?

Now we know a little more about pensions, you may be wondering whether self-employed pension contributions are tax deductible. As long as you’re a UK taxpayer and under the age of 75, you’ll be eligible for tax deductible self-employed pension contributions. Depending on how much you pay into your pension, the government will add an extra 20% through tax relief.

If you would like to learn more about tax deductible self-employed pension contributions, hiring a pension advisor can help to simplify things. They’ll be able to advise you on the best pension for you as well as any tax relief you can receive.

What are the new state pension rules for self-employed workers?

As of 6th April 2016, a range of new state pension rules for self-employed workers came into play. These rules can help to give you a better indication of what you’ll get when you retire. The most important thing to consider here is your National Insurance contributions.

If you haven’t paid National Insurance before the 6th April 2016, you’ll need to make 35 years of payments to qualify for your state pension. Otherwise, you’ll need upwards of 10 qualifying years to be eligible for your state pension.

A qualifying year is where you’ve paid sufficient National Insurance contributions. If you would like to learn more about how to qualify for your state pension, please visit the GOV.uk state pension explained page.

What is my self-employed state pension entitlement?

In order to receive a state pension, you’ll need to have paid enough National Insurance over your life. You can check your self-employed state pension entitlement, you predicted retirement age and the amount you’ll receive through the GOV.uk check your state pension page.

How to find a pension scheme for self-employed people

In order to find the best pension scheme for self-employed people, you’ll need to take a little time to learn more about your options. Thankfully, the following considerations should help you to choose the right self-employed pension scheme for you:

  • Firstly, choose the best pension type to fit your requirements. For example, would you prefer to choose where your money is invested using an SIPP?
  • Consider using a comparison site to search a range of different self-employed pension schemes. Never just pick the first pension scheme you find, it’s worth researching and looking into the benefits of several schemes before choosing the most suitable.
  • Summarise your top choices and compare them against each other for different features and advantages.
  • Always look into any necessary charges and make allowances for these when investing.
  • Don’t overextend yourself. It isn’t worth getting into debt by pouring too much of your income into a pension scheme.

How to start a self-employed pension

It really is better to start your private pension fund as soon as you can. This will mean you can pay in lower monthly amounts than you would need to if you waited to start later in life.

When you’re in a position to start investing in your future, you’ll need to know how to start a self-employed pension. Use the below tips to guide you through the pension setting up process:

  • First things first, work out exactly how much you can spare each month. Make sure all your bills are covered, then look at your disposable income. Never sign up for a pension that has higher payments than you can afford.
  • Consider ways to cut down on business expenses so you have more money available – view our article on money saving tips for businesses for more advice.
  • Next, look into the best type of pension for you. Would you like extra control through an SIPP or would you rather invest in a stakeholder pension?
  • Pick a scheme that is right for you. Consider using a comparison site to summarise all the benefits and fees for a range of schemes.
  • To save time, you can usually sign up online or over the phone if you need to ask any questions.
  • Top tip: It may be worth choosing a provider with an easy-to-use website or app to allow you to monitor your investment.
  • Consider using a financial advisor to help you decide on a pension scheme and to answer your questions.

Handy self-employed pensions checklist

  • As long as you’ve made sufficient National Insurance contributions you should be eligible for a state pension.
  • Self-employed state pensions are often not high enough to support your current lifestyle.
  • Investing in a self-employed private pension now will mean you can enjoy a stress-free retirement.
  • You can choose from ordinary, stakeholder, self-invested and NEST pensions.
  • It’s well worth taking a little time to find the right pension for your needs.

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