Top Pension Tips for the Self-Employed
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Self-employment has its benefits, from flexible working hours to the freedom of being your own boss, but the risk of financial uncertainty in retirement certainly isn’t one of them.
If you’re one of the 4.8 million people in the UK who trades this way, there’s often nobody to help you choose the right pension plan, no permanent employer to share responsibility for your contributions, and fluctuating earnings come with their own monetary headaches. But it’s not all doom and gloom. There are some great pension options out there for the self-employed and these top tips will help you on your way to choosing the right plan.
Why it’s important to set up a pension if you’re self-employed
If you’re self-employed, you’re entitled to the State Pension like everyone else, but for the current tax year that will amount to an income of just £168.60 per week.
Although the sum you actually receive could be higher if you’ve worked for someone else in the past, many contractors and sole traders are concerned they won’t be able to get by on this income alone. Indeed, figures from IPSE suggest that 67% of self-employed people are seriously worried about how they’ll cope financially in retirement.
It’s never too soon to start thinking about the pension options available to you. Keep in mind that paying into a pension scheme early could significantly increase your retirement income when the government tax relief of 25% is factored in.
Let’s say you were to pay £100 per month into a pension scheme (at the standard savings growth rate of 5% and charges of 0.75% per year) from age 40. The government adds an extra 25%, giving you a pot worth £46,000 by the time you’re 65. But if you were to pay the same amount in from age 30, your pot would be worth £70,000 by age 65.
Things to consider when setting up a self-employment pension IPSE’s research indicates that just 31% of self-employed Britons are paying into a pension plan, and that, quite frankly, is alarming. If you’re among the 69% who isn’t, most experts would suggest that you change that pronto, and here are the first things to consider…
- Track down any previous workplace or personal pensions: It’s always worth looking into the possibility of consolidating any old pensions you have and combining them with your new plan so your investments are easier to manage. If you’re having trouble tracking them down, check out the government’s Pension Tracing Service.
- The type of pension you want: Personal pensions are popular among self-employed professionals and they generally come in three forms: standard personal pensions, SIPP’s and stakeholder pensions. Which of the three you should choose depends on your needs, circumstances and appetite for risk. Be sure to thoroughly research each of these product types and weigh up their pros and cons against the alternatives. The government’s NEST scheme, for instance, is open to the self-employed and could be an option if it’s a straightforward, no-frills pension you’re after.
- Find an independent pensions expert: Seeking expert advice beforehand is highly recommended. Not only can an independent pensions advisor help you choose the right product, they will carry out a free review to establish how your investments are performing and provide ongoing advice when your plan is up and running.
If you think you have been mis-sold your pension, you may also be entitled to mis-sold pension compensation. With the gender pension gap being wider than ever, it’s time us women in particular started paying closer attention to our future, and ensuring that your pension is performing appropriately is a crucial first step.
