The best options for your self-employed pension

Lisa Caplan


4 min read

If you work for yourself, a self-employed pension will make your money work for you.

self-employed pension

Being your own boss is big business in the UK, with thousands more people every year joining the ranks of the self-employed, but research shows that many self-employed people are wary of investing in a pension. The good news is that it’s more straightforward than you might expect and there are big tax advantages as well. Here’s the low-down on how to save for retirement with a self-employed pension.

Self-employed people aren’t putting money aside for the future

4.93 million people are self-employed in the UK andthat number is likely to increase in the future. Working for yourself involves managing your own finances – including arranging your own self-employed pension. Research this year shows that, for many people, it’s way down the list of priorities.

Our research shows that half of all self-employed people do not have a pension fund. Of those who do, they invest, on average, £77.46 a month – less than half the average contribution of £169.851.

According to HM Revenue & Customs, the number of self-employed workers investing in a personal pension has plummeted by a third in just four years. The amount they contribute is also down 18.3 percent in the past two years – from £1.97bn in 2015/16 to £1.61bn in 2017-182.

Research by Citizen’s Advice gives some clues to the reasons why people are not investingin their pension. Even recently, there has been widespread confusion about the advantages of contributing to a pension, and many either misunderstand or fail to appreciate the tax benefits they bring. Research also shows that many self-employed people don’t realise that most pension plans can be very flexible.

Self-employed incomes tend to fluctuate, making it vital to have the option to pay less or stop paying altogether during periods of lower income and have the option to pay in more at times of higher income.

Are you saving enough for a comfortable retirement? Find out with our handy pension calculator:

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Why you should have a self-employed pension

A pension offers a better deal than many self-employed workers realise. You might not have an employer making contributions, but you still get Income Tax relief. This means that, if you’re a basic rate taxpayer, for every £100 you contribute the pension provider will claim an extra £25 from HMRC and add it straight into your pot.

It’s also wise to start early. Paying into your pension might not seem like your most pressing priority but the longer your money is invested, the more it benefits from compound returns.

Where to put your money

Forget what you thought you knew. Pensions have changed. They now give you more flexibility both when you’re paying in and taking money out.

 

First up, it’s important to note that you can access your pension early from age 55 and upwards – although we expect this age to rise in the future. However, only the first 25% is completely tax free and the remaining three quarters is taxable as income.

The most relevant pension type for those going it solo is the Personal Pension. They can be flexible, handing you a heap of control over your contributions. Otherwise, you can play it straight with a regular amount or a lump sum.

This latter option makes sense if your income is irregular. Either way, you don’t need to decide at the outset whether you make monthly payments or none whatsoever. And you have the final say on where money is invested and what level of risk works for you.

A Self Invested Personal Pension (SIPP) is a particular type of personal pension that even offers more flexibility, with a wider range of investments to choose from and more control over the investments you buy. Be aware though, some providers have complex charging structures and higher fees, so be sure to fully research any scheme and unearth the sneaky fees you could be paying on your pension.

If your solo gig is a limited company, there’s the option of paying into your pension from your personal income, or making a contribution as an employer. We recommend that you find out more around employer contributionsbefore taking the plunge.

Other ways of saving

It can be helpful to spread your money across a combination of a pension plan and Individual Savings Accounts (ISAs). Having some of your money in an easily accessible ISA is a wise decision if your income is unpredictable. There is a wide range of ISA products suitable for retirement, including:

  • the cash ISA – a simple, tax-free savings account allowing you to save up to £20,000 per year
  • the stocks and shares ISA – a tax-efficient way to invest up to £20,000 per year
  • the Lifetime ISA – available to those aged under 40 and entitles you to an annual government bonus of 25 percent on annual contributions up to £4,000, but it is more difficult to access before 60.
  • the Innovative Finance ISA – any interest earned in peer-to-peer investments will not be taxed, nor will it count towards your Personal Savings Allowance

Sources:

[1] The survey was conducted by Populus on an online sample of 2,076 GB/UK adults between 2-4 July 2019. Data is weighted to be representative of the population of Great Britain. Targets for quotas and weights are taken from the National Readership Survey, a random probability F2F survey conducted annually with 34,000 adults. Populus is a founder member of the British Polling Council and abides by it rules. For further information see: http://www.britishpollingcouncil.org

[2] The number of self-employed workers investing in a personal pension, as of 2017-18, has plummeted by a third in just four years, as reported by The Telegraph – Self-employed savings crisis: pension contributions plummet as record numbers work for themselves  https://www.telegraph.co.uk/money/consumer-affairs/self-employed-savings-crisis-pension-contributions-plummet-record/

Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. Pension rules apply and tax rules may change in future. If you need help with pensions, seek independent financial advice.

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Lisa Caplan

Lisa Caplan is head of financial advice at Nutmeg. She combines her wide experience of developing brands for blue chip companies with eight years as a chartered financial planner delivering financial advice to a range of people at different stages of their lives.


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