According to the UK’s Office of National Statistics, there were approximately 4.25 million self-employed workers in October 2013.
Whilst independence is one of the biggest advantages of being self-employed, it also causes problems, and not least with regards to saving for a pension.
The state pension
With a current worth of GBP 110.15 each week, you probably need to consider supplementary or entirely separate pension provisions to the state pension.
You should also be aware that if you have paid insufficient National Insurance (NI) contributions, you will not receive your full state pension.
If you retired after the 6th of April 2010, you will have to have 30 years’ of NI contributions to obtain your full state pension, although there are proposals to increase this requirement to 35 years from April 2016.
To understand your position with regards to your state pension, you should obtain your NI statement from HMRC and consult with a regulated, independent financial advisor.
Tax relief
It is estimated self-employed workers loose out around GBP 91,512 from lack of company pension scheme contributions.
However, tax relief means any contributions you make will be partially matched by HMRC. A basic rate taxpayer will receive a GBP 25 top up from HMRC for every GBP 100 they save.
You can contribute as much as you like to however many pensions you wish.
However, there is an upper limit with regards to tax relief – either 100% of your earnings or the annual allowance of GBP 50,000 until 6th April 2014 (whichever is larger) – and when you contribute over the limit, you do not receive tax relief.
In lieu of company pension schemes
When choosing a pension scheme that works for a self-employed individual, there is a wide range of providers to choose from, mostly offering the following three core schemes: Personal pensions, Self-Invested Personal Pensions (SIPPs) and stakeholder pensions.
A personal pension means you can create your own arrangements on your contributions.
They are offered in some supermarkets, high street banks, insurance companies, and investment organisations.
Your pension fund grows in line with your contributions, the performance of your investments, and any tax relief you receive. It will decrease via the costs your provider charges to run the scheme and how you choose to use the money upon retirement.
With standard personal pension schemes, your fund is invested on your behalf. If you want to take control over your investments, a SIPP may be a better option; allowing you to invest your money as you see fit in a much wider range of asset classes.
A SIPP can either follow your own investment strategy, or be maintained by a fund manager or stockbroker of your choosing. There are extra charges depending on how you run your scheme, and potentially for any specialist investments.
Stakeholder pensions, offered by the same providers who supply personal pensions, do for the most part follow the same guidelines.
The primary difference is stakeholder pensions follow rules laid out by the Government, namely, there is a limit to the charges you pay, and there are no charges for stopping, transferring or otherwise altering your funds.
They offer the ability to accept low and flexible contributions – meaning they have to accept your contribution if it totals over GBP 20.
If your income is volatile, a stakeholder pension may be the best option for you.
With the wide range of options available, seeking professional advice will ensure you choose the correct scheme for your needs.
A regulated independent financial advisor (IFA) can also outline any negative considerations you should take into account for any of the schemes listed here, and highlight how to maximise your contributions with regards to tax relief.
About John Cassidy
