CHASING payments, finding new clients and paying the bills on time… there’s so much to worry about if you are self-employed that saving into a pension is probably the LAST thing on your mind.
But ignoring yours could leave you with a huge black hole in your retirement savings. You don’t need bags of cash – just £50 a month can leave you £55,920 better off, and setting one up takes just minutes. Here, we ask the experts, so you don’t have to…
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There are 4.5 million self-employed people in the UK, according to latest figures from the ONS.
But shockingly, just one in five have a pension, according to the Institute of Fiscal Studies – and there’s lots of reasons behind this.
Once you stash cash into a pension, you can’t access the money until you turn 55, rising to 57 from April 6, 2028.
Cash-flow can be a problem for the self-employed, as you’re not guaranteed a monthly income like you are working for an employer.
So many workers don’t want to lock their cash away in case they need to dip into their savings to tide them over during a bad month.
But one of the main reasons why many don’t even HAVE a pension is because they miss out being automatically enrolled into a pension scheme.
If you are aged 22 and over and earning more than £10,000 a year, you are automatically enrolled into your employer’s pension scheme.
Best of all, your company will pay cash out of their OWN pocket into your pot.
The rules are that employees pay in at least 5 per cent of their annual salary into their pension, and their employer pays in 3 per cent.
But there’s no such scheme if you are self-employed – it’s up to YOU to build up your own pot, and you don’t get the benefit of free cash from an employer.
Don’t worry – it’s never too late to start saving. Follow our guide to saving for your golden years without feeling broke in the here and now.
Can’t I just live off the state pension?
IF you’re just banking on the state pension alone to retire on, you’ll struggle.
The maximum state pension is worth around £12,548 a year.
But according to Pensions UK’s latest “retirement living standards”, golden oldies now need a yearly minimum of £13,900 to retire.
That means you face a shortfall – and you may not have enough to cover all your essential bills, like housing and energy costs.
Help! I don’t have a pension… what’s my first step?
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Pensions are one of the most tax-efficient ways to save, so don’t miss out.
Open one online – it takes just minutes to do.
There are several different types to choose from, depending on how much control you want over where your money is invested.
A personal (or private) pension is a straightforward option. You pay contributions to a pension provider, and they invest the money in funds on your behalf.
Funds are like a shopping basket of lots of different types of investments. That includes stocks (where you own a small slice of a company), gold, and government bonds (which are loans to the government).
Many providers offer a range of funds that are ready-made for you. All you have to do is send the money over into your pension, and the rest is taken care of for you – making it a relatively hands-off option.
Then, there’s a self-invested personal pension (SIPP).
This is where YOU pick and choose what your money is invested in, not your pension provider.
As well as picking your own stocks and funds, you can also pick other types of assets like investment trusts, which are companies that invest your money in a mix of assets, and an Exchange-Traded Fund (ETF) which is a ready-made basket of investments that you can buy and sell on the stock market.
However, more choice means more responsibility for managing your own investments, so this option is best suited for those who are comfortable with investing.
Then there are stakeholder pensions. These are provided by a bank, building society or insurance company and are designed to be simple and accessible.
They come with government-set rules, including a cap on management charges of 1.5% a year for the first 10 years and 1% a year after that. You can also pay in as little as £20 at a time.
They’re best for savers who want a straightforward pension without making large regular payments.
Another option is the National Employment Savings Trust (NEST). It’s a government-backed workplace pension scheme that’s also available to self-employed workers.
Your money goes into a ready-made fund which adjusts its approach as you get closer to retirement. This is different from some personal pensions, where you have more choice over how your money is invested.
It can suit those who want to save for retirement without having to choose and manage investments themselves.
When you’re picking a pension, make sure you look at the fees that the pension provider charges.
Fees are usually charged by pension providers to invest and manage your pot.
Picking a pension plan with lower fees could save you THOUSANDS.
If you started paying in £50 a month into your pension at the age of 25 and paid 0.75% in charges, you could have £22,289 over 20 years.
But if the fees were higher at 1.5%, you’d have £20,592 over the same period.
Paying into a pension doesn’t have to be a fixed commitment. You can usually decide when and how much to contribute into it.
Becky O’Connor, head of pensions at PensionBee, said: “Some self-employed people, particularly those with volatile incomes, often wait until the end of the tax year to pay in a lump sum to their pension, but if you can, it makes financial sense to contribute smaller amounts more regularly.”
Drip-feeding your pension contributions can also help smooth out the impact of market highs and lows.
You usually need to save at least £25 a month, sometimes as much as £100, if you are setting up a monthly direct debit though. Check with your pension provider.
Get FREE pension advice and boost your pot by £1,000s
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Sticking with your current provider could cost you thousands of pounds in retirement.
That’s why Pense is offering free pension advice for people with pots of all sizes – whether it’s a drawdown or annuity.
Speak to one of their specialists to get a detailed breakdown of your options.
Pense Ltd is authorised and regulated by the Financial Conduct Authority number 231629.
How to get up to £12,000 in FREE cash every year
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Self-employed pension contributions are eligible for tax relief. This means the Government effectively adds in free money to your pension when you pay in.
It works by your provider usually claiming 20% tax relief on your behalf from the government, and then adding this cash to your pot for you – so there’s no need for you to do anything.
That means if you pay in £80, another £20 is added to your pot for FREE, giving you a total of £100.
You can contribute up to £60,000 a year into a pension or 100% of your earnings, whichever is lower. This includes tax relief.
If you are a higher-rate taxpayer, you can claim an extra 20 per cent tax relief, and if you are an additional-rate taxpayer, you can claim an extra 25 per cent tax relief – but you’ll usually need to do this yourself through filling out the Tax Reliefs section of your self-assessment tax return.
It’s a no-brainer claiming this additional tax relief – but around 800,000 higher earners are forgetting to do this.
“You may also be able to carry forward unused allowances from the previous three tax years,” said Andrew Prosser, head of investments at InvestEngine.
If you save the maximum £60,000 into your pension, you pay in £48,000 and the government will effectively add an extra £12,000 into it, giving a total of £60,000.
And say if you saved £50 a month into your pension – £600 a year – the government would top it up by an extra £150.
Be aware that if you run a limited company, the rules around tax relief are slightly different.
You can choose to make personal contributions into your pot, or, your company can pay directly into your pension as an employer contribution.
If you choose the latter option, then rather than getting 20 per cent tax relief added to your pension, the company can usually claim the contribution as a business expense, reducing its taxable profits and potentially its corporation tax bill too.
But get professional financial advice first before deciding which option to choose – the tax rules can be tricky.
‘I didn’t start paying into my pension until my mid 40s – here’s how I’ll be £53k richer in retirement’
SAVING into a pension wasn’t a priority for Marie Brearley while she was working as a self-employed beauty therapist.
But over two years ago, Marie was hit with a rising sense of panic as she realised that she hadn’t saved a penny towards her retirement.
Marie was earning between £10k-£12k a year at the time – well below the minimum wage rate at the time of around £20,318 per year.
Like many self-employed people, Marie found that her income would go up and down – and found it difficult to commit to locking her cash up in a pension while the cost of living was squeezing the family’s finances.
She had planned to put £150 a month into her pension – but never managed to make that happen.
“The money I should’ve been paying into my pension was a week’s worth of shopping or it went on Christmas or getting the car serviced,” she said.
So she put a plan of action together to save her retirement.
Marie decided to set up a private pension as it allowed her to save away extra money while she was self-employed.
Over two years she has built up £10,000 into her self-invested personal pension (SIPP), which is invested in trust funds and FTSE 100 companies.
She also benefits from 20% tax relief.
She got a new job working in property last year which increased her salary, allowing her to start saving more.
But crucially, her new job means she was set up with a new workplace pension scheme by her employer – which should turbo boost her savings.
In two years, she has managed to save £2,000 into her workplace pension pots.
If Marie chooses to continue working until her state retirement age of 68 and puts monthly payments of £50 into her private pension, then she could have an estimated £53,000 in her pot by retirement, according to calculations by Hargreaves Lansdown.
Read her full story here.
How £50 a month could turn into £55k
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It all depends on how much you are putting in – but the main point is that you should start NOW and put aside whatever you can afford, even if it’s just a little bit.
A 35-year-old who starts saving £50 a month would have £55,920 by the time they reach 68 – the age at which they can start claiming the state pension, according to Interactive Investor.
That assumes investment growth of 5 per cent each year, annual fees of 0.75%, and basic-rate tax relief as well.
While a 45-year old would have £28,217 by the time they retired (68), and a 50-year old would have £17,217 (state pension age of 67 under current timetable).
Don’t forget… a Lifetime Isa
YOU can also set up a Lifetime ISA (LISA) alongside your pension to build a bigger retirement pot.
You can pay up to £4,000 a year into a LISA and the government adds a 25 per cent bonus, up to £1,000 a year.
You have to open an account before your 40th birthday and stop paying into it when you’re 50.
Then access the funds tax-free from age 60.