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Self-Employed Pension Guide

When you’re self-employed, it can be more difficult developing the best savings habit to grow your pension for the retirement you’ve been working hard for.

You don’t have the benefits of someone picking your pension plan for you, and you completely miss out on contributions from your employer. You don’t have the benefits of auto enrolment and, on top of that, you have to navigate irregular income patterns to ensure you’re saving enough for the future.

There are around 4.8 million self employed people in the UK, yet 45% between the ages of 35-55 have no private pension, according to the Money Advice Service.  This falls to just 16% for those in employment. 

Whilst it’s certainly easier for those in employment to prioritise saving for retirement, it doesn’t have to be difficult for the self employed. All you want is a comfortable income throughout your retirement, but you could be putting your future financial security at risk by not preparing for the future.

Read Moneyfarm’s guide to pensions for the self-employed to discover your options.

Do you need a pension if you’re self-employed?

Regardless of whether you work for yourself or somebody else, few people want to continue working forever. 

Having a pension is crucial if you want to achieve the retirement lifestyle you’ve been looking forward to. Instead of letting inflation eat into the long-term value of your savings, you can make your money work harder for you on the financial markets.

You can decide to save into a personal pension through a traditional pension provider or join the government-backed Nest scheme, which is designed around auto-enrolment. Although it’s been introduced for the workplace, it’s available for individuals too.

If you want to invest in a broader range of assets to benefit from diversification, have more control of cost, or even greater visibility, you can put your money in a self-invested personal pension (SIPP).

If you’re an employee of your own company, you may be able to make employer contributions into your personal pension. Since pension contributions count as an allowable expense, you can deduct them when you’re calculating your business’ taxable profits. You don’t pay National Insurance on pension contributions either, so you could take a chunk off your tax bill by paying into your pension.

The pension challenges facing the self-employed

There are many pros to being self-employed, but you can miss out on some great benefits of workplace pensions. You’re not automatically enrolled into your company pension scheme and you don’t have an employer to pay into your pension on your behalf. 

The government sets a minimum level that both you and your employer have to pay into your pension through auto-enrolment, usually based on your qualified earnings – you’re earnings before income tax and national insurance. 

From 6 April 2019, this minimum total contribution is 8% of your qualified earnings. Your employer has to pay at least 3% of your qualified earnings, you have to contribute at least 4%, and then the government adds tax relief of 1%. 

Being your own boss has many benefits, but without access to pension plan guidance, auto-enrolment, or contributions from your employer  it’s easy for the future to slip down to the bottom of the to-do list when you’re managing your competing priorities – especially when predicting uncertain income. 

How much will you need in retirement?

It’s generally thought that you need two thirds of your final salary to maintain your standard of living in retirement. After all, you’ll probably have paid off your mortgage by then, your children will be independent and you won’t have to fork out for commuting.

If you want to comfortably afford the essentials and a few luxuries along the way – like eating out and affording a European getaway every six months – you’ll need around £26,000 a year, research from consumer research group Which? Shows.

An annual income of £26,000 gross translates into a pension pot worth a minimum of £520,000, assuming you have no state pension income.

It’s reasonable to expect that you can earn an annualised return of 5% from a balanced and diversified portfolio over the long term. Assuming this is your return, you can then withdraw 5% from your pension each year and theoretically you’ll ever deplete the nominal value of your pension.

If you’re after a bit more of the high life when you reach retirement, you’re probably going to need around £37,500 a year. 

Remember, your priorities will change as you get older, and the jet-setting lifestyle will probably switch for better life insurance.

You’ll need a pension pot worth at least £750,000 when you retire to withdraw 5% for an annual income of £37,500. If you’re more on the conservative side and reckon you can earn 4% a year, you’ll need a pension pot worth at least £937,500.

For most people, having a pension is essential to achieve these target income levels. The opportunity to contribute to your pension from your limited company’s pre-tax income and receive generous tax relief on your pension contributions make pensions an attractive savings vehicle for the self-employed. 

Pension options for the self-employed

There are plenty of different types of pension available to suit your needs as a self-employed worker.

State pension

Once you hit state pension age, you’ll be eligible to get income from the government to see you through retirement – as long as you’ve contributed to national insurance (NI) for 35 years. A new flat rate state pension was introduced in April 2016, which is based entirely on your national insurance record. You’ll probably get a proportion of your state pension if you’ve between 10-35 qualifying years of NI contributions. 

If you reached state pension age before 6 April 2016, the most you’ll get is £129.20 a week – which adds up to £6,718.40 a year. If you reached retirement age after 6 April 2016, you should get the new state pension of £168.60 a week, which is £8,767.20 a year. 

If you’ve ever worked for somebody else in the past, you might have built-up some entitlement to the additional state pension under the old system. You can check on the government’s website.

The state pension is certainly a good supplement to the retirement income you generate from a personal pension, but it’s important you ask yourself whether you can comfortably rely on this during retirement.

Personal pension

You can set up and pay into a personal pension – also known as a private pension – yourself. Rather than relying on a company pension scheme, you can choose the right personal pension for you from a host of providers. Personal pensions give you more flexibility over how much you contribute and over what your pension is invested in.

You can to claim tax relief on what you pay in relative to your tax bracket, which is a generous boost to your pot. It is also possible to transfer pensions from previous jobs into a single personal pension, which makes it easier to understand exactly what you’ve got saved, what you’re invested in and what you’re being charged.

Self-Invested Personal Pension (SIPP)

Self Invested Personal Pensions (SIPPs) are a type of personal pension. SIPPs are popular with investors looking to reach their retirement dreams, as they give investors more flexibility, transparency and control over their pension investments.

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By making an investment, your capital is at risk.

The value of your personal pension depends on how much you put in it, how long you’re invested for, how your investments perform, and how much you’re charged in management fees.

Both you and your employer can pay into your pension, and you can contribute if you’re self-employed. The flexibility allows you to maintain your savings plan even if you change jobs or stop working.

You can invest in a wide range of assets through a SIPP, although not all pension providers will allow you to invest in all asset classes through their platform. This list of asset classes includes:

    • Stocks and Shares
    • Exchange‐Traded Funds
    • Investment Trusts
    • Funds
    • Bonds
    • Bank Deposit Accounts
    • Commercial Property
    • Real Estate
    • Offshore Funds

The Moneyfarm Pension

SIPPs can be expensive and hard work to manage yourself, especially if you’re managing your investments yourself. For busy people juggling their careers with family life and other money management, it’s sometimes more reassuring to let the experts do it for you.

Digital wealth managers like Moneyfarm are shaking up the traditional industry. Gone are the days where you have to accept the expensive fees attached to SIPPs that eat into your long-term return, reducing the money you have for your retirement.

The Moneyfarm Pension is a personal pension plan designed to give you financial security throughout retirement. 

As one of the first digital wealth managers to offer regulated digital investment advice, we’re committed to bringing advice to more people and changing the relationship people have with their investments.

We provide a unique combination of digital investment advice and discretionary management to help people make confident, stress-free investment decisions and build a more financially secure future

When you sign-up, we’ll ask you some questions about your financial goals, appetite for risk and financial situation, to match you with an investor profile. We then look at your time horizon and risk appetite to find you an investment portfolio that’s specifically built by our team of experts to reflect your investor profile for as long as you invest with us.

Our experienced Investment Consultants are available in person, by phone, email and chat to explain our advice, provide market insight, as well as investment guidance and retirement planning

Benefits of a pension in retirement for the self-employed 

Pensions are designed to maximise your income in retirement. Some of the key benefits of having a pension are:

A tax-free lump sum

Once you reach the age of 55, you can take 25% of your pension pot tax free, with the remainder being used to provide you with an income throughout your retirement – typically through an annuity or income drawdown. You decide what you do with your tax-free lump sum, but it’s important you don’t waste it because once it’s gone, it’s gone.

Regular income in retirement

Once you reach retirement you have flexibility over how you use your retirement savings. You can enter drawdown and withdraw lump sums, generate a steady income or do both, as and when you choose, or swap your pot for an annuity – a regular income throughout retirement. Moneyfarm’s Pension Drawdown service is free. Get in touch with our Investment Consultants to find out more. 

Tax relief

Personal pensions have generous tax benefits attached to take advantage of as you save for your future, as you build up your savings, and as you draw from your pension savings in retirement.

To encourage you to save for your future, the government offers tax relief on your pension contributions relative to your income tax band, which can boost your pension savings by 25%.  

If you’re a basic rate taxpayer, you’ll get 20% tax relief on your savings, whilst those in the higher tax band get 40% relief and additional rate taxpayers get 45% relief.

Essentially, this means a basic rate taxpayer only has to pay £8,000 into their pension to make an overall contribution of £10,000. Over the long-term, this can make a real impact to the size of your pension pot.

When you come to draw from your pension savings, you can take 25% of it tax-free from the age of 55. The rest of your pension income will be subject to income tax. Remember, whilst you may qualify for higher tax relief (40%) when you’re building up your savings, you’re likely to fall back to the basic band during retirement (20%).

Transfer old workplace pensions

You may be your own boss now but you might have several pension pots from your previous jobs. When you have lot of little pensions, it’s difficult to understand how much you’ve got, how your investments are performing and even how much you’re paying, which can all impact your return. Combining your pensions into one place can help give you the control to make better decisions to help you reach your financial goals. 

Problems with pensions for the self-employed

Before jumping into opening your pension, it’s important you are aware of all the facts.

You can’t access your pot until 55

Pension schemes don’t allow you to access your funds before a set retirement age – usually around 55 for most providers. 

Payment plans can be difficult to stick to

Having a long-term plan is important for anyone building a pension pot. Paying in a consistent amount each month can help you maximise your returns, but might not always be possible with uncertain income patterns. Moneyfarm’s Pension is flexible, which means you can set up a direct debit or invest lump sums, so you can choose the best way to reach your financial goals. 

Quick fire questions

How much should I be saving each month?

The simple answer is as much as you can. A couple in their 30s who want to have an annual income of £26,000 during retirement will need to put away £198 a month, or £424 a month for an annual income of £39,000. Find out more about how much you need to save into your pension with our pension calculator.

Can I access my pension savings at any time?

No, once you’ve put your money in your pension you can’t access it until you get to the age of 55, although you don’t have to draw from your pension until later.

What is my annual allowance as a self-employed person?

As a self employed person you have the same allowances as an employed person. There’s a cap on how much you can contribute to your pension to receive tax relief each year. In the 2019/20 tax year, this limit is £40,000 or your annual salary – whichever is lower. The government applies a tax charge, called the annual allowance tax charge, if the total contributions to your pension savings for a given tax year exceed your annual allowance.

Can I transfer my other pension savings to my Moneyfarm Pension?

You can transfer money from your other pensions into your Moneyfarm Pension, including from SIPPs and workplace pension schemes, so long as you haven’t started to take income from them. You won’t be able to transfer defined benefit schemes, also known as final salary schemes.

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