Self-employed pension
In the UK, only 20% of self-employed people have a private pension compared to over 80% of the employed workforce. That means some two million people are expected to face financial challenges after retirement.
In addition, the pensions landscape is different for self-employed workers, who don’t have an employer to make contributions on their behalf. The responsibility of enrolment in a plan and making sufficient contributions lies solely with them.
Challenges facing pensions for self-employed workers
For the employed, the auto-enrolment initiative means pensions are usually handled through a workplace scheme and both employee and employer contributions are made through PAYE. Self-employed workers, however, must choose a scheme, set retirement goals and make the necessary contributions themselves.
Another challenge that the self-employed face is income variance. Contract work often results in income fluctuations, making a fixed monthly contribution difficult. As such, a pension that allows for variable payments is necessary.
Self-invested personal pensions (SIPPs)
Self-invested personal pensions are the most common type of pension scheme for self-employed individuals who are operating through a limited company. Funds can be invested into a variety of assets, giving savers more control over their investments. However, savers need to have enough time available to manage their pension and take advantage of allowances and reliefs that will reduce their tax liability.
Self-employed pensions and tax relief
Self-employed people can pay into a pension and benefit from tax reliefs while also increasing their retirement fund.
- The Annual Allowance – Self-employed people can receive tax relief when paying up to £60k or 100% of annual income (whichever is the lower) from relevant earnings into a personal pension. The relief takes the form of a 25% pension contribution from the Government.
- Basic Rate Taxpayers – A 20% pension tax relief can be claimed at source by the pension provider
- Higher and additional Rate Taxpayers – Self-employed people earning over £50,270 per year can benefit from extra tax relief on their personal pension contributions. Higher rate taxpayers can claim 20% tax relief on their taxed earnings, while additional rate taxpayers can claim 25%. This must be done through the self-assessment tax return.
- Limited Companies – Pension payments can be made as a business expense which lowers your corporation tax bill, but tax relief won’t add to your pension.
Pension tips for self-employed individuals
In order to make the most of your pension, you can:
- Start saving early to give yourself more time to accumulate funds for your retirement.
- Contribute more when your earnings are high to maximise contribution while keeping your business financially secure.
- Choose the right scheme for your circumstances and when you hope to retire.
With economic uncertainty dogging the UK and living costs rising, it pays to seek professional help regarding your pension. Speak to a reputable accountant or financial advisor to discuss your circumstances and find the best plan for your needs. This will enable you to save efficiently for retirement while also leveraging available tax reliefs.
Sources: https://www.enterprisenation.com/learn-something/only-20-of-self-employed-have-a-pension/
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