funds for your retirement
If you’re self-employed, saving into a pension can be a more difficult habit to develop than it is for people in employment. There are no employer contributions, and irregular income patterns can make regular saving difficult. But preparing for retirement is crucial for you too.
Don’t rely on the State Pension
If you’re self-employed, you’re entitled to the basic State Pension in the same way as anyone else. The full basic State Pension is currently set at £115.95 a week. The amount of State Pension you receive depends on your National Insurance contributions, and sometimes those of your current or former spouse or registered civil partner. To get the full amount, you need 30 qualifying years of National Insurance contributions or credits (more if you reached State Pension age before 6 April 2010).
But that’s the extent of your entitlement to the State Pension – you can only claim the additional State Pension if you’ve had periods of employment during your working life.
On its own, the basic State Pension is unlikely to provide you with anything like your current standard of living. So it’s crucial that you plan how to provide yourself with the rest of the retirement income you’ll need.
An efficient way to save for retirement
One big attraction of being self-employed is that you don’t have a boss. But, in terms of pensions, that’s a disadvantage. Workplace schemes can be a convenient way for employees to start contributing to a pension, and in many cases their employers will make contributions too.
If you’re self-employed, you won’t have an employer adding money to your pension in this way. But you’ll still get Income Tax relief on your contributions. If you’re a basic-rate taxpayer, for every £100 you pay into your pension, HM Revenue and Customs will add an extra £20.
Start as early as possible
The earlier you start saving into a pension, the better. It gives you more time to contribute to your fund before retirement, more time to benefit from tax relief, and more time for growth in your fund’s value due to investment returns and the power of compounded returns.
What kind of pension should you use?
There’s a range of different types of pension scheme you can consider, including stakeholder pensions, personal pensions and SIPPs (self-invested personal pensions).
How much can you save?
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 maximum amount of pension savings that benefit from tax relief each year is called the ‘annual allowance’. The annual allowance for 2015/16 is £40,000. If you go over £40,000, you won’t get tax relief on further pension savings. You can usually carry forward unused annual allowance from the previous three years.
Pension ‘input periods’
Pension payments are made over 12-month periods called ‘input periods’ – but these don’t always follow the tax year and may differ if you pay into different schemes.
