Self-employed pension not your top priority? You could you be missing out on almost £450,000

The government’s compulsory pension auto-enrolment initiative could save many employees from a cash-strapped retirement – while the self-employed might be seriously missing out.

According to The Sun, five million self-employed people face losing out on almost £450,000 for their retirement fund because they’re not automatically enrolled into a pension.

Here’s what the self-employed are losing out on

If you’re an employee, there are certain criteria you need to meet to be auto-enrolled. You need to:

  • be aged between 22 and state pension age
  • be employed in the UK
  • earn at least £10,000 a year

Under the current rules, employees need to pay in at least three per cent of their monthly salary to their pension fund, while their employer is required to pay in at least two per cent.

And those payments are set to rise from April 2019, with employees contributing a minimum of five per cent and employers a minimum of three per cent.

What does this mean in real terms?

Let’s assume a retirement age of 68. If you’re self-employed from the age of 22 and you never pay into a pension fund, you’re essentially missing out on 46 years of contributions.

Compare that to an employee who’s auto-enrolled, who could end up with £447,188 of cash to enjoy a more comfortable retirement with, according to The Sun.

How much do you need to retire?

Households of retired Which? members spend around £2,200 a month, reports the consumer group. This takes into account the basics plus European holidays, hobbies, and eating out.

For those aiming for a more luxurious latter stage in life, £39,000 a year is a more realistic figure, which equates to around an extra £1,000 per month. That’s if you want to include long-haul trips and a car upgrade every five years.

How do you save for your retirement if you’re self-employed?

The Money Advice Service say self-employed people tend to use a personal pension to save for their retirement. It gives you the option to choose where you want your contributions invested – with the provider usually offering a range of different funds.

They’ll claim tax relief at the basic rate of tax for you, and add it to your pension pot. Three factors affect how much you’ll get back when you retire:

  1. How much you pay in
  2. How well your investments do
  3. The charges you pay

Types of personal pension

  • Ordinary personal pensions: offered by most large providers.

  • Stakeholder pensions: with a maximum charge capped at 1.5 per cent and the option to stop and start premiums without being penalised.

  • Self-invested personal pensions: offering a wider range of investment options, but usually higher charges.

Read our article for everything you need to know about self-employed pensions including National Employment Savings Trust (NEST) pensions.

NEST pensions are offered through the NEST Corporation, which has no owners or shareholders and is run purely for the benefit of its members.

Is there an upper limit on how much you can pay in to your pension?

There’s no limit to the amount you can pay in to your pension fund each year, but there is a limit to the tax relief that can be claimed on your contributions.

The maximum ‘annual allowance’ is £40,000, or if your salary is lower than that, it’s 100 per cent of your salary. Any amounts over and above that don’t qualify for tax relief.

Other ways the self-employed fund their retirement

Don’t forget, you’re entitled to the State Pension in the same way that employed people are. In tax year 2018/19, the full level of State Pension is £164.35 a week.

Some people who work for themselves also invest in property as part of their retirement plan, but your return on investment depends on being able to sell the property and how high a sale price you achieve.

With more rules coming into place and fewer tax breaks for buy-to-let landlords, renting out properties may be less of a sure earner for retired people than it once was.

What the future holds

As things stand, many self-employed people may be forced to keep working beyond the State Pension retirement age because they simply won’t have enough money to live on if they don’t.

However, there’s cross-party pressure from within parliament for the government to set up an auto-enrolment scheme for the self-employed, similar to the one already in place for employees – which is one possible way to tackle the crisis.

What do you think?

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