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How do pensions work if I am self-employed?

In the UK most employed people have a pension that is provided by their employer which includes an employer and an employee contribution.

For the self-employed, there is no such luxury and so it falls upon the individual to make their own pension arrangement.

In this post, we’re going to look at how pensions work for the individual, self-employed business owner and give you some ideas about how you might like to provide for your retirement.

Why bother with a pension?

Retirement probably seems a long way off but life has a way of creeping up on you and before you know it you’ll be wondering where the time went.

Making sure you have enough put by to look after you in retirement should be high on anyone’s priority list.

Pensions are an incredibly important topic if you are self-employed and it is important to remember that as the population ages, and in response to the demographic time bomb the UK government has a policy of paying pensions later and to a lower value than previously.

In consequence, self-employed people need to make provision on their own account to ensure that they have sufficient income and that they can take it exactly when they want rather than waiting until the government chooses to pay them.

Pensions – the good news

Over the last few years, the government has made great efforts to ensure that everyone makes provision for their retirement.

For employed people, this means that they have set up the compulsory pension system (Auto Enrolment) that requires employers and employees to pay into a private pension.

For the self-employed, the government has chosen to offer the incentive of a tax top-up that increases the value of a £100 contribution to £125 for a basic rate taxpayer.

Great strides have been made in terms of flexibility and the option of taking lump-sum payments out of the pension pot on retirement.

What types of pension are available?

The important thing to remember is that there is no such thing as a ‘best’ pension for the self-employed.

Everybody has different personal circumstances and so it is imperative that you take proper pension advice before taking out a plan.

There are in general four types of pension available to the self-employed.

The first option is to join the government scheme NEST  (National Employment Savings Trust) which has now been opened up to allow self-employed people to contribute.

This is a government-run scheme and so should be seen as a safe option although there have been complaints about the efficiency of the administration.

Option 2 is to look at a Personal Pension. Sometimes known as a private pension these are provided by the big names in the industry and the individual can make regular and one-off contributions.

When you make contributions the provider will claim back tax relief on your behalf from the government and then add it to your pension pot and the value of the pot is used at retirement to provide an income or to pay a lump sum.

The third method of saving for your retirement is to look at a Self Invested Personal Pension or SIPP.

A SIPP allows you to choose where your money is invested. You can do this actively yourself or appoint a money manager to do it on your behalf and many people like the additional control this allows.

Naturally, this means that it is best for a financially aware investor and so a SIPP isn’t always the best option for everyone.

Option four is to look at a Stakeholder Pension.

Stakeholder pensions have been designed as a way to provide the flexibility needed by the workforce and allow a low starting contribution ensuring that even those who are on a low income can still make some provision for their retirement.

There are very strict conditions around this type of pension such as having capped fees and it also has a great deal of flexibility built in so that if you move from employment to self-employment and back again the pension can still cope.

The really important point is to take advice

What we have given you here is just a quick overview of the options available for self-employed pensions and is in no way designed to be an in-depth guide.

As we mentioned at the start of the piece, everyone’s circumstances are different and so you really should take professional advice before you choose which pension is right for you.

If you would like to talk to us about the options available then why not contact us here and we’d be happy to talk you through the subject.