How to make pensions work if you are self-employed

11th July 2018

One in seven UK workers is self-employed, which is unsurprising given the attractive perks of the job. The ability to set your own hours, determine your own salary and take orders only from yourself is the holy trinity for some.

For other’s self-employment may be a necessity.

However, there is one major financial hurdle facing all of those who work for themselves; pensions.

The introduction of Automatic Enrolment into Workplace Pensions has meant that millions of UK workers are now contributing to a pensions fund who previously had no provisions to provide a retirement income for themselves. Unfortunately, they are only available for employed people.

So, what can you do to make sure that you have enough money in retirement when you work for yourself?

1. Consider the benefits of pensions

Pension contributions, which are specifically designed to be used to save toward retirement will attract tax relief which means that a percentage of your contributions will be added to your fund by the government.  How much you will get depends on your Income Tax rate; if you pay 20%, you will receive tax relief of 20%, and if you are a higher rate taxpayer, your contributions will attract 40%.

Tax relief is applicable to a maximum of £40,000 in contributions each year. A tapered reduction in tax relief could apply if you earn more than £110,000 per year. However, worrying that you are paying too much into a pension to benefit from tax relief is a sure-fire sign that you need one-on-one financial advice, so please get in touch.

2. Adjust your contributions

Depending on your industry and business model, your income may fluctuate from month-to-month. If so, it may be wise to consider raising the amount you put into your pension when times are good and reining it in when cash flow is tighter.

If you prefer, you could make level contributions each month, and top up your fund by adding a lump sum at the end of the year, reflective of the performance of your business.

3. Understand the State Pension and make sure you get it

There are different types of National Insurance payable depending on employment type.  If you are self-employed, it is likely that you will need to pay Class 2 and 4 contributions, but this will depend on your annual profits.

Class 2 contributions are paid by self-employed people earning more than the threshold, for the 2018/19 tax year that is £6,205. The rate is equal to £2.95 per week, but you will usually pay this in six-month or yearly instalments alongside your other tax payments.

Class 4 contributions need to be paid by self-employed people who earn more than £8,242 (for 2018/19, though this threshold may change each tax year). The rate for Class 4 contributions is 9% on profits between £8,242 and £46,350, and 2% on any profits above this.

Class 3 contributions are voluntary. You can make Class 3 contributions to fill gaps in your National Insurance record and ensure that you are able to claim the benefits you will need, including the State Pension.

You will be able to claim the State Pension if you have at least 10 years of contributions on your record. However, the amount you will receive increases alongside the number of years you have made contributions for.

You need to have 30 qualifying years of National insurance contributions on your record to qualify for the Full State Pension.

Click here to get a state pension forecast.

4. Consult a professional

Putting any amount of money aside for the future is a great start toward building your pension. However, how do you know that you will have enough to live your desired retirement lifestyle? The answer lies in talking to a financial adviser or planner and gaining an insight into:

  • Your ideal retirement income
  • Your current circumstances
  • Any shortfall between the two
  • The options available to help you to meet your goals

A financial adviser or planner will be able to talk you through the strategies you could use to build up your pension fund and ensure that you have enough to generate the retirement income needed to support you when you leave working life behind.

Engaging with us could also boost your confidence, allowing you to make better financial decisions, knowing that you have the support of a professional, with years of experience, knowledge and qualifications to help you reach your goals.

Furthermore, research from Unbiased has shown that those who seek financial advice could benefit from an additional £98 in pension savings each month, which could lead to an annual retirement income boost of £3,654.

To find out how to make pensions work for you as a self-employed individual, feel free to get in touch.