Self-employed? Saving for retirement is even more important
If you’re self-employed, saving into a pension is a more difficult habit to develop. You don’t benefit from employer contributions, irregular income patterns can make regular saving a challenge and you won’t have an HR manager routinely explaining the benefits to you. In fact research by the Money Advice Service has found that over half (53%) of self-employed men and over two-thirds (67%) of self-employed women have no pension savings whatsoever. Here we explain the benefits of setting up a pension and what you can do to get your retirement savings on the right track with little hassle.
Don’t rely on the State Pension
Anybody is entitled to the basic State Pension, but you need to have made 30 years of National Insurance contributions (more if you reached the State Pension age prior to 6 April 2010) to qualify for the full basic State Pension amount, currently set at £113.10 a week.
A new, single tier State pension comes into effect in April 2016 which will benefit the self-employed as anyone retiring after this date will be entitled to a higher State Pension of £148 per week. But this is still far below what most people want to retire on.
Why start a private pension?
Pensions have a number of important tax advantages that make your savings grow more rapidly than might otherwise be possible and if you want to have a comfortable life in retirement, you need to save.
Once your income is over a certain level, the Government takes tax from your earnings. However, if you put money into a personal pension scheme, it qualifies for tax relief. This means that as well as the money you’re putting in, some of your money that would have gone to the government as tax now goes into your pension pot instead. This gives pensions a big advantage over other savings vehicles.
The table below illustrates how three investors who pay different tax rates can start a pension valued at £12,500 and the available levels of tax relief:
|Basic||Higher (40%)||Additional (45%)|
|How much does the investor contribute? (80%)||£10,000||£10,000||£10,000|
|How much does the Government then contribute into the SIPP (20%)||£2,500||£2,500||£2,500|
|Total pension value||£12,500||£12,500||£12,500|
|How much extra tax relief can the investor then reclaim via their tax return?||£0||£2,500 (20%)||£3,125 (25%)|
|Total tax relief||£2,500(20%)||£5,000 (40%)||£5,625 (45%)|
|Total cost to the investor of the £12,500 SIPP||£10,000||£7,500||£6,875|
The earlier you start the better
The sooner you start a pension, the more time you have to contribute before retirement. This means you have more time to benefit from tax relief and more time for your pension to grow in value due to both investment returns and the powerful effects of compounding.
Starting early could more than double your pension fund. Someone saving £100 a month for 40 years (eg from age 25 until 65) would put the same amount into their pension fund as someone starting 20 years later and contributing £200 a month. But the early starter would have a much bigger fund on retirement. Assuming 6% investment growth throughout, the person starting at age 25 would build a fund of around £190,000, whereas the later starter’s fund would reach £90,000. Of course, when investing returns are not guarenteed and you may get back less than you originally invested.
Our pension delay calculator shows you how much you could stand to gain by starting a pension now instead of putting it off.
Picking the right type of pension
There’s a range of pension schemes to choose from, including stakeholder pensions, personal pensions and SIPPs (Self-invested Personal Pensions). Each has its pros and cons but in our opinion, SIPPs have some standout advantages: they can be cost-effective and are incredibly flexible - an important consideration if you’re self-employed and have irregular income patterns - and allow you to choose exactly where and you invest your money.
Download our What is a SIPP? guide to find out more.
Gain control: moving previous pensions
If you have existing pensions you have the right to transfer your pension into your new arrangement (subject to approval by the pension scheme).
Having pensions scattered across different providers can make it difficult to know how well they are performing, or if you are taking a suitable amount of risk with them. What’s more, as our renowned Spot the Dog Pension Edition shows, many pension schemes are eating away at your hard-earned retirement savings.
One of the best ways to keep control is to bring all of your investments together. Find out why reviewing your pension makes sense with our helpful guide.
Can you afford to retire?
Typically a half to two-thirds of your current income should be enough to meet your needs when you retire. When thinking about how much you need in retirement you should ask:
- What will your regular bills be? (utility bills, phone, any mortgage payments/rent, insurances, loans, food, travel, petrol, TV licence, prescription charges for example)
- What else will you do during the week? (see friends/family, spending money for entertainment)
- What occasional expenses do you incur? (clothing, holidays, special occasions)
- What else might happen? (house /car repairs, emergency medical bills, relatives asking for help)
You’ll now have a figure which will indicate the level of pension you need.
Use our free planning calculator to find out how much you need to save to afford retirement.
How Bestinvest can help
Bestinvest was voted Low Cost SIPP Provider of the Year by the FT and Investors Chronicle in 2013. Our Best SIPP gives you control over your retirement savings and the flexibility to choose from an enormous range of investments. It is also one of the lowest-cost SIPPs on the market so you won’t end up wasting unnecessary money on fees and instead will have more money to invest for your future. And if you need help managing your investments, we have a range of services available that offer additional assistance and a network of offices across the UK. Find your nearest Bestinvest and get in touch, or download our Best SIPP guide to see what you could gain in retirement by becoming a client of Bestinvest.
The value of investments can go down as well as up, and you may get back less than you originally invested.
SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Self-directed investors should regularly review their SIPP portfolio, or seek professional advice, to ensure that the underlying investments remain in line with their pension objectives.
Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change.