Pensions for the Self-Employed

Pensions for the Self-Employed 

Preparing for retirement is just as important for the self-employed, but it can seem like a daunting prospect without an employer to guide you as to which pension scheme to pay into, or if your income patterns are irregular or erratic. While you’ll be entitled to the state pension, on its own this is unlikely to be enough to maintain the standard of living you would like. 

All employers now have to provide a workplace pension scheme for its employees and make contributions into it, but if you’re self-employed you won’t have the benefit of an employer adding money to your pension pot. The earlier you start saving into a pension, the more time you’ll have to grow your savings and benefit from the tax relief. 

What is the State Pension? 

Whether you’re employed or self-employed, you will be entitled to the state pension when you reach retirement age. In April 2016 a new flat-rate state pension was introduced and is based entirely on your National Insurance record. For the year 2019-2020, the state pension amount is £168.60 per week*. 

If you were employed in the past, you might have built up entitlement to additional state pension under the old system. You can request a State Pension statement on the gov.uk website. 

Tax Relief 

If you start paying into a pension pot, you’ll benefit from tax relief on your contributions up to the lower of your annual earnings or £40,000 a year. In real terms, this means that if you’re a basic-rate taxpayer, for every £100 you pay into your pension the government will add an extra £25. Your pension provider will claim the tax relief on your behalf and add it to your pension savings. 

If you’re a higher-rate taxpayer, you can claim back a further £25 for every £100 you pay into your pension. You’ll need to claim the extra rebate via your tax return. 

In Scotland, you can claim an additional £1.58 for every £100 paid if you pay tax at the Scottish Intermediate Rate of 21%, and a further £26.58 if you pay tax at the Scottish Higher Rate of 41%. 

Which Type of Pension is Right For Me? 

Most self-employed people use a personal pension for their pension savings. With this kind of pension, you choose your provider and where you want your contributions to be invested from a range of funds on offer. 

There are three types of personal pension: 

1. Ordinary personal pensions, offered by most large providers 

1. Stakeholder pensions, where the maximum charge is capped at 1.5% and you can stop and start premiums without a penalty 

1. Self-invested personal pensions, which have a wider range of investment options but usually higher charges 

NEST Pensions 

NEST is the National Employment Savings Trust, the workplace–pension scheme created by government for automatic enrolment. Although it’s primarily for people in employment, it can also be used by self-employed people. Find out if you’re eligible at nestpensions.org.uk/schemeweb/nest/members.html. 

How Much Will I Get Back? 

The size of your pension pot when you retire depends on a number of factors, including how long you save for, how much you pay in, how well your investments have performed and what charges have been taken out by your pension provider. 

Is There A Limit on How Much I Can Save? 

There is no annual cap on how much you can contribute to a pension plan, but there is a limit on the amount that will benefit from tax relief. This amount is known as the annual allowance and for 2019-20 it’s £40,000 (or 100% of your earnings for the year if less than £40,000).  

You can however carry forward unused annual allowance from the previous three years. 

As with any financial decision, it’s important to take your time to really understand your options. It may be worth consulting a regulated financial adviser who will provide guidance and recommendations based on your individual circumstances. 

*Pension rules and tax rates are subject to change.