Saving pension often can be difficult for a self-employed compared to an employed person. There is no one who can choose pension scheme for you, no employer contributions and irregular income patterns which can all make savings difficult. The earlier you start saving, the better it is. It will give you more time to benefit from tax relief and more time for your savings to grow. But preparing for retirement is vital for self-employed too, so find out how you can start.
What is the State Pension?
The government pays the state pension as a regular payment to eligible people who have reached state pension age.
- From April 2016, there is a new flat rate state pension which is based entirely on your National Insurance record.
- For the current tax year (2019-20) the new State Pension is £168.60 per week.
Why it’s important to have pension if you’re self-employed:
Did you know that only 18% of self-employed are paying into a pension as compared to 50% of employees are paying into a pension.
What kind of pension should I use?
Most self-employed people use a personal pension for their pension savings. Personal pensions are pensions that you arrange yourself. Some employers offer personal pensions as workplace pensions.
The money you pay into a personal pension is put into investments (such as shares) by the pension provider. The money you’ll get from a personal pension usually depends on:
There are three types of personal pension:
Alternatively, self-employed people can also use NEST (National Employment Savings Trust) which the workplace pension scheme is created by government for automatic enrolment.
It’s run as a trust by the NEST Corporation which means there are no shareholders or owners and its run for the benefit of its members.
Although NEST is primarily for people who are employed, they also allow some self-employed people to save with them.
What is the Annual Allowance?
Generally, the earliest you can take your personal pension is at age 55. If you are under the age of 75, you can get tax relief on contributions of up to 100% of your UK earnings if you are a UK taxpayer, subject to the annual allowance. You can save as much as you like towards your pension each year, but there’s a limit on the amount that will get tax relief.
The annual allowance for 2019-20 is £40,000 (or 100% of your earnings for the year if less). If you go over £40,000, you won’t get tax relief on further pension savings.
Now, you need to decide how much to pay into a pension. Of course, this depends on many factors such as how much you can afford to contribute and how much you think you need to put on retirement. The contribution amount suggested is 15% on your pre-tax income. Hope you find this guide helpful.