In the Autumn Budget, the government committed to making it easier to save at all stages of life. Part of this commitment was a promise to help self-employed workers save more for retirement. The precise details of this are to be advised by the DWP in a working paper expected imminently. Without the benefits of an employer scheme, regular employer contributions and given for many, income can be irregular, saving for retirement for the self-employed has been somewhat unstructured with limited regulation and support.
The self-employed are entitled to the State Pension, providing, during their working life, they make the requisite national insurance contributions. To get the full State Pension, a 35-year record of national insurance contributions is necessary. Even for those eligible for the full State Pension, this is unlikely to provide you with enough income to do any more than cover the basics of living. For the current tax year (2018-19), the State Pension is only £164.34 per week.
With this in mind, we are of the belief the self-employed need to plan early to ensure their retirement requirements can be met. There are some different structures available to the self-employed including Self Invested Pension Policy (SIPP) and Small Self-Administered Scheme (SASS) options, each of which has their own regulatory framework. Whatever scheme is right for the self-employed, the reality is the same fundamentals apply.
Key Pension Fundamentals for the Self-Employed
1. Pension Plan Options
Most self-employed people use a personal pension plan. This gives an individual the flexibility to choose where they want their pension monies to be invested but many have their savings in only one plan. The approach at Prosperis is to allow our clients to have full visibility of their investments by building a diversified portfolio to help reduce risk.
There are various types of personal pension, including:
- Ordinary personal pensions
- Stakeholder pensions
- SSAS, but these are only available to those who have a Sponsoring Company
Alternatively, self-employed people do have the option of NEST (National Employment Savings Trust). The government has designed this as an alternative to automatic enrolment.
2. Utilise tax breaks
As a self-employed individual, there are key tax breaks you should not miss out on. You will get tax relief on your contributions, up to the lower of your annual earnings of £40,000 a year. Any investment in a pension above £40,000, within a tax year, gets no tax relief. As a basic rate taxpayer, for every £100 you pay into your pension, the government will add an extra £25. All higher rate taxpayers can also claim back a further £25 through their tax return.
3. Thinking about the long term
The earlier you start saving into a pension, the better. The key here is to start small and think big. This gives you more time to contribute into your pension, more time to benefit from tax relief and more time to see your savings grow.
4. Seek good advice
The amount you have available to you at retirement depends on a number of things:
when you start saving
- the age you choose to retire
- your contributions and your investment decisions
At Prosperis we can help you with all of this.