Pensions for the self employed
There are over 4 million self-employed in the UK. But while the self-employed have a degree of workstyle freedom they don’t have any employer benefits like an employer pension contribution.
There are tax benefits still, so you’ll get tax relief on your contributions, usually up to £40,000 a year. If you’re a basic-rate taxpayer, for every £100 you pay into your pension, the government will add an extra £25. If you are a higher rate taxpayer you can claim back a further £25 for every £100 you pay in through your tax return.
The younger you are when you start, the better, giving more time for contributions and growth.
Starting early could more than double your pension pot:
Most self-employed people will be familiar with the name personal pension for their pension savings. Here you decide on the contribution and the funds you wish to invest in. Contributions are eligible for tax relief and the basic rate relief is automatically added to your contribution, so grossing up the money going in.
There are three types of personal pension:
- ordinary personal pensions which are offered by most large providers;
- stakeholder pensions where the maximum charge is capped at 1.5% and you can stop and start premiums without penalty
- self-invested personal pensions which have a wider range of investment options, but usually higher charges
Self-employed people can also use NEST (National Employment Savings Trust) which is the workplace pension scheme created by for auto enrolment. Although NEST is designed for people who are employed, they also allow some self-employed people to save with them. You can find out if you are eligible to save with NEST here.
You can contribute as much as you want into your pension each year, but the maximum amount of pension savings getting tax relief each year is called the annual allowance. The annual allowance for 2016-2017 is £40,000. You can also usually carry forward unused annual allowance from the previous three years.
Be careful to check all charges since a small % difference over a long period can make a big difference to your final pot. The same rule applies to the growth rate, but here there is far less control since future growth is an unknown factor whereas costs are more fixed.
Your attitude to risk is also a key factor to the level of growth, since you may for example be risk adverse and therefore not prepared to go for a fund carrying more potential. Having said that there is no guarantee that a higher potential growth fund will outstrip a lower one since not all funds perform as predicted or hoped for and higher risk funds can have a tendency to greater volatility. Also as the old saying goes, if it looks “too” good to be true, it probably is!!!