7 retirement saving tips for the self-employed

Rachael Oku

by , VP Brand and Communications

at PensionBee

24 Oct 2018 /  

7 retirement saving tips for the self-employed

One of the best things about the modern world of work is the flexibility on offer. Millions of us are taking advantage, swapping the trappings of a 9-5 for the freedom of freelance. Figures from the ONS show that the number of workers in self-employment increased sharply from 3.3m in 2001 to 4.8m in 2017, making up around 15% of the British workforce. And, with the growth of the so-called ‘gig economy’ exploding in recent years, there looks set to be many more self-employed workers in the future.

But while there are many undeniable perks to self employment – such as being your own boss, choosing your own hours, projects and clients – there are also some pitfalls. Chief among them the lack of safety net in terms of job security, sick pay, holiday pay and pension provision.

Government data suggests that as many as 45% of self employed workers between the ages of 35 and 55 have no private pension, compared to just 16% of employees. The fact that employees can enrol in a workplace pension scheme and self employed workers can’t is one of the key factors contributing to this divide. Without the benefits of Auto Enrolment, which compels employees and their employer to contribute towards a pension, self employed workers are missing out – to the tune of hundreds of thousands of pounds over their career.

One of the big pension companies calculated that an average 22-year-old starting a workplace pension today would be able to build around 46 years’ worth of Auto Enrolment contributions equalling as much as £447,188 by retirement.

If the government doesn’t make good on its manifesto promise of including the self-employed in its Auto Enrolment reforms, commentators are warning that the UK could face a pension crisis in future decades. But it’s not all bad news as there are lots of things self-employed workers can do to ensure they’re financially prepared for retirement. Here are seven retirement saving tips for the self-employed.

1. Calculate how much you have an how much you need

Before you do anything else you’ll need to assess your current financial situation and consider your future needs. It’s estimated most people will need about 70% of their salary to live comfortably in retirement, but the amount you’ll require will largely depend on your circumstances and the type of lifestyle you want to lead.

When you’re deciding how much to save into your pension, you’ll need to think about how much you can afford, how long you’ve got until you retire and your desired retirement income. Our pension calculator can help you crunch the numbers by taking details of your current age, the age you’d like to retire, how much you have in savings and how much you want to earn as income each year. It’ll tell you how much you need to save each month to reach your target, and give you an accurate snapshot of what your retirement could look like.

2. Start saving sooner rather than later

The earlier you start saving into a pension, the more time your pension will have to grow. Compound interest is the interest that you earn on your pension’s interest, and if you leave your pension untouched for several decades it can turn a small savings pot into a big pension pot by the time you retire. The longer you wait to start saving, the more of your salary you’ll have to sacrifice each month to reach your goal.

3. Maximise your tax relief

To encourage workers to save into a pension the government offers generous tax breaks. You can save up to £40,000 into your pension this year and receive tax relief from HMRC. Basic rate taxpayers get a 25% tax top up, so if you pay £100 into your pension, HMRC will add £25, bringing the total contribution to £125. If you’re a higher or additional rate taxpayer you can claim further tax relief via your Self Assessment tax return.

4. If you have a limited company, get further tax breaks

If you’re a self-employed worker who’s also the director of a limited company, you can use your company to pay employer contributions into your pension. Pension contributions count as an allowable business expense, which means you can use these payments to reduce your corporation tax bill. Your company won’t pay National Insurance on these pension contributions either, so you could save additional tax when you pay money from your company into your pension.

5. Find your old pensions

Although you’re self employed, you may have had one or two jobs earlier in your career where you could have been enrolled into a workplace pension scheme. If you think you may have started a pension there are a few things you can do to try and find it. The government’s Pension Tracing Service is a good place to start. Simply enter either the name of your pension provider or your former employer and it will try to locate the details of your workplace scheme.

Alternatively you can contact your old employer for help or ask your new pension provider for assistance. PensionBee can help you locate all of your old pensions and transfer them into a new plan when you sign up. You just need to give us some basic information like a pension number or provider name and we’ll take care of the rest.

6. Consolidate your pensions into one

There are several self-employed pension options you can choose from. A personal pension will let you make contributions on a regular or ad-hoc basis and the value at the retirement will be based on how much you’ve saved and how your money’s been invested. A SIPP (self invested personal pension) lets you invest in a wider range of assets and you can decide how your money gets invested or defer to a professional money manager. A stakeholder pension scheme has a minimum gross contribution of £20 and fees are capped at 1.5% a year, for the first 10 years.

Whichever pension option you choose, it can be a good idea to consolidate your pensions so you can keep a closer eye on how your investments are performing. By transferring all of your pensions into one modern pension, you should end up with a pension that’s well matched to the amount of risk you want to take and you should save money on management fees too.

7. Check your State Pension entitlement

Thanks to rising life expectancies and an ever-increasing State Pension age, there’s no guaranteeing what today’s younger workers will receive by the time they retire. At the moment all workers need to have paid National Insurance Contributions for at least 10 years to qualify for the State Pension, and to receive the full amount of £8,546.20 a year in 2018/19, they’ll need to have paid for at least 35 years. To ensure you’re on track to receive the full amount you can view your National Insurance record online using the government’s State Pension checker.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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