Self-employed pensions – what you need to know

Self-employed pensions might seem like a great idea, but with lots on your plate, sorting one out can slide to the bottom of the priority list. Our complete guide makes it simple – from the options you have to the best self-employed pension calculators on the web.

Despite working hard and building a business by yourself, you’re much less likely to have a pension, if you’re self-employed. It’s a gloomy fact, but a report from The Pensions Advisory Service (TPAS) recently found that less than a third of self-employed people are paying into a pension.

If you’re working for an employer, there are all sorts of ways that you can take care of your pension, almost without thinking about it. But as a self-employed worker, what are your pension options? Bookmark our complete guide to self-employed pensions, starting off with why you should be saving.

Self-employed pension contributions: why start saving?

Simply put – no one else is going to do it for you. It’s true that you’ll be entitled to the State Pension, but for the current tax year (2017/2018), this flat rate benefit would give you £159.55 a week. Even with a few savings tucked away, is this enough for you to live on?

For most people, the State Pension isn’t going to cover retirement. But most people aren’t self-employed, which means that their employer has probably enrolled them into a pension scheme auto enrolment is now a legal requirement for all UK employers).

With people living longer, retirement can last for decades – great if you’re well-prepared with a pension pot to enjoy, but not so great if you only start planning in the few years before you stop working.

Self-employed pension plans: which one is best?

The most popular option for a self-employed pension is a ‘personal pension’. But with lots of options available, take a look at our round-up below and decide what’s right for you.

Personal pensions

A personal pension lets you choose your own provider, and then decide how to invest your contributions from a range of funds. The provider will claim basic-rate tax relief (see ‘Self-employed pension tax relief’ below) on your behalf, which will be added to your savings.

What you get back depends on what you put in, how your investments perform, and the level of charges you pay. You can choose from three types of personal pension:

  • Ordinary personal pension (offered by most large providers)
  • Stakeholder pension
  • Self-invested personal pension (SIPP)

SIPPs will give you a wider range of investment options, but usually carry higher charges, whereas a stakeholder pension will cap the maximum charge at 1.5 per cent.

NEST

The National Employment Savings Trust (NEST) isn’t just for people working for employers, despite being a workplace pension scheme. It’s run as a trust by the NEST Corporation, meaning that there are no shareholders or owners – it’s run purely for the benefit of its members.

The guidance from NEST is that you can usually join if you’re self-employed or a sole director of a company that doesn’t employ anyone else.

To check your eligibility and get set up, visit the self-employed page on NEST’s website.

Not sure which? Get advice

If you’re not sure which scheme is best, getting help from a regulated financial adviser can save a lot of worry.

They’ll recommend a pension plan based on your specific circumstances. Even better, if the plan they suggest turns out to be unsuitable or the provider goes bust (this is very rare), you’ll be protected.

Find a financial adviser using the Money Advice Service’s handy search tool.

Self-employed pensions: how much should I save?

The amount you should save for your pension broadly depends on two things: how much can you afford, and how big a pension do you want to retire with?

You should also keep in mind how far away you are from retirement. If you’re still young and have plenty of time to save, you can get away with paying a lower percentage of your income into your pension.

If, however, you start saving later in life, you’ll need to save more each month to get a good level of retirement income.

For people in employment, a general rule of thumb for working out what percentage to save is to half your age – if you start at 30, then save 15 per cent, if you start at 50, then save 25 per cent. This, of course, isn’t always as easy when you’re self-employed, and you may need to be more flexible.

Another (and more accurate) way to work out how much to save, is by using a pension calculator.

Self-employed pension calculators

A pension calculator works out your estimated retirement income, based on key factors like how long you’ve been saving and how many years you have left until retirement. Most providers will have one, and they all have different features.

Here are five popular pension calculators (just make sure you’re entering the contributions you plan to make, even if you haven’t started saving yet):

Money Advice Service

Money Advice Service explain everything thoroughly as you work through the calculator, providing you with a personal report at the end.

You can leave the employer contributions toggle at zero, as a self-employed worker – just make sure you’re putting in some estimated contributions, even if you’re not sure yet how much you want to save.

Standard Life

For a clear picture of retirement, Standard Life’s calculator is a good tool to start with. It’s not built specifically for self-employed savers, but it gets to the point quickly, with lots of ways to toggle how much you plan to save.

There’s no sign-up wall or email confirmation box to get through, and all projections are explained in the ‘more info’ boxes. You’ll need to have certain details to hand though, so make sure your pension history from any previous employers is in order.

Pension Bee

This calculator from Pension Bee allows you to reduce the ‘Employer monthly contribution’ toggle to zero, which is handy if you’re self-employed and not receiving anything from an employer. Simple to use and easy to play around with, this is a great calculator to start off with and comes with lots of tips for boosting your pot.

Make sure you enter your personal contributions, even if it’s still just an estimate.

Aviva

The Aviva pension calculator gets you to fill in a few quick details, before building your personal projection. You’ll need to enter information for at least one personal pension, so even if you haven’t set one up yet, test out your plans and add one in, with the monthly contributions you think you’re aiming to make.

Age UK

Age UK’s calculator goes a bit further, helping you build a monthly breakdown of your spending. As with our other calculators, you’ll need to assume a few things, like the contributions you’re aiming to make, but this is a good tool for bringing your pension to life and understanding where your pension pot could take you.

Self-employed State Pension entitlement

From April 2016, the UK has a new flat rate State Pension, based on your National Insurance (NI) record. For the current tax year (2017/2018), this gives you £159.55 a week.

If you worked for someone else in the past, you may have built up entitlement to additional State Pension under the old system, so you could get more. To check your total State Pension entitlement, take a look at Gov.uk’s State Pension service.

Self-employed pension tax relief

You might not have an employer sorting out your pension for you, but that’s no reason to miss out on the benefits of paying into your own pot.

If you’re paying in to a pension, you’ll get tax relief on your contributions, usually up to £40,000 a year. If you’re a basic-rate taxpayer, this means you’ll get an extra £25 for every £100 you pay in.

For higher-rate taxpayers, you can claim back a further £25 for every £100 you pay in, when you come to do your tax return.

Looking for self-employed insurance?

With Simply Business you can build a single self employed insurance policy combining the covers that are relevant to you. Whether it’s public liability insurance, professional indemnity or whatever else you need, we’ll run you a quick quote online, and let you decide if we’re a good fit.

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