Minutes to read 4
Having a good self-employed pension in place is crucial for self-employed people to be financially secure in retirement so they don’t have to work longer than they want to, aren’t overly reliant on the state pension and can live comfortably without any financial worries.
But the pensions landscape is different for the self-employed compared to those in employment. They don’t have an employer to make contributions for them and they have the responsibility of ensuring they have a pension plan in place and make sufficient contributions.
Much like taxes, pensions are something of an afterthought for those in conventional employment. Their pensions are usually handled through a workplace scheme where the employee makes monthly contributions which are supplemented by employer contributions and NICs for the state pension are deducted at source through PAYE. This means everything is effectively handled by the employer and HMRC with little to no administrative burden on the employee.
As self-employed people don’t have an employer, they bear the responsibility of choosing the right pension for their circumstances and retirement goals and ensuring they make the necessary contributions.
This is made more challenging due to income variance which is a something all self-employed people have to manage. Contract work by its very nature means that income fluctuates so self-employed people might be unsure how much they should contribute to their pension every month, or in some months they might not be able to afford to contribute, so a pension that allows variable payments is important.
Variable payments give self-employed savers a degree of control and financial flexibility. Unlike in an employer pension scheme with a set amount paid in each month, self-employed people can choose when and how much they pay into their pension. This adaptability means they can adjust the amount they pay in, and when they pay it, based on their financial position.
In periods where earnings are strong, bigger pension contributions can be made and during quieter periods pension contributions can be reduced or paused. The allows for more effective cashflow management and enables businesses to be more financially resilient.
It’s worth noting that many self-employed people will have savings in a workplace pension from previous employment which needs to be factored in when planning for the future.
Self-Invested Personal Pensions (SIPPs)
Self-Invested Personal Pensions are the most common pension scheme for self-employed people operating through a limited company. Funds are invested into a range of assets and SIPPs give savers a greater degree of control into where the investments are made and a broader range of assets available to invest in.
SIPPs are therefore appropriate for savers with investment and financial expertise that want a hands-on approach to managing their pension and greater control over where the investments are made.
Savers will need to have sufficient time available to dedicate to managing their pension and they can also take advantage of tax allowances to reduce their tax liability.
Self-Employed Pensions and Tax Relief
There are many reasons why people move into self-employment and prominent amongst those are the tax benefits it presents with the Government providing tax relief for self-employed people so they can leverage their pension to reduce their tax bill and benefit in the here and now whilst also increasing their retirement savings.
- The Annual Allowance – Self-employed people can receive tax relief when paying up to £60k or 100% of annual income from relevant earnings into a personal pension. Whichever is the lower amount qualifies for the relief which takes the form of a 25% pension contribution from the Government.
- Basic Rate Taxpayers – 20% pension tax relief claimed at source by the pension provider
- Additional Rate Taxpayers – Self-employed people earning more than £50,270 a year can benefit from extra tax relief on their personal pension contributions. Taxpayers in the higher rate bracket can claim 20% tax relief on their taxed earnings and additional rate taxpayers can claim 25% tax relief. This isn’t done automatically and must be done in your 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 the Self-Employed
Begin Saving Early
Starting your pension contributions earlier gives you more time to accumulate a bigger pot, more time for your pension to grow and more time to benefit from the various tax reliefs available. The normal minimum pension age is 55 rising to 57 from 2028 so there’s no time like the present to ensure you’re prepared for retirement.
Contribute More When Your Earnings Are High
In periods when you have lucrative contracts and are earning more it’s sensible to capitalise and increase the amount you pay into your pension. This allows you to maximise your pension contributions whilst keeping your business financially secure by reducing payments during quieter periods whilst still making regular payments in the long term.
Choose the Right Scheme for You
There are a range of schemes available and the right pension depends on individual circumstances including your earnings, time to retirement, the level of investment risk you’re prepared to face and how hands-on you want to be in managing your pension. If you’re unsure it’s always a good idea to seek advice.
Get Expert Help
With the amount of pension choice and fiscal uncertainty that self-employed people face it pays to engage expert help from a financial adviser regarding your pension so you find the best plan for your circumstances that allows you to efficiently save for retirement whilst leveraging all available tax reliefs.
Self-Employed Pensions with Gorilla
If you’d like to learn more about self-employed pensions and retirement planning, we can refer you to our trusted partners at Azets Wealth Management. Azets’ independent advisors will understand your financial goals and provide expert advice to structure your wealth to create a retirement plan that works for you, giving you peace of mind that you’ll be secure in retirement. Request a callback today to speak to an accountant.
