Self-employed? Don’t forget your pension
First published 02 November 2015 • Updated 18 July 2018
They say 'Don't ignore the workplace pension' - but that's exactly what many self-employed people are doing. If you are your own boss, saving into a pension is easy to forget about - but if anything, it's even more important to remember.
Thanks to a certain big purple monster named Workie, the workplace pension is now a bit harder to ignore. But the Department for Work and Pensions may have missed a trick by not giving him a twin sister (they could have called her Selfie) to represent pensions for the self-employed.
The number of self-employed people in the UK is around five million and rising, but the percentage who save into a personal pension has been falling steadily over the past ten years, so that now under a quarter of them are actively building their pension. The self-employed are notoriously bad at saving for retirement – perhaps telling themselves that they can just keep on working since there’s no-one to force them to retire. But could you really keep up the same pace well into your 70s and 80s? Would you want to?
The ‘can-do’ attitude of entrepreneurs may prove to be the downfall of many in later life – it’s another example misplaced overconfidence. Some may be put off saving into a personal pension because it’s not as good value as a workplace one (since there are no employer contributions). But if this is you, then you’re missing a huge opportunity, because a pension is still the safest and best-value investment it’s possible to get your hands on.
If you’re self-employed and don’t yet have a pension, here are seven tips you might not know, which could change your mind.
You can use Nest, the government’s pension scheme
The National Employment Savings Trust (Nest) was set up to allow employers to enrol their workers in a low-cost government pension plan if they didn’t have a workplace scheme in place. Initially it wasn’t available to self-employed people, but it is now, so as a self-employed person (or single person director) it’s simple to enrol yourself in Nest. The charges are typically lower than for a personal pension scheme, although one drawback is that you can only invest £4,700 per year. However, there’s nothing to stop you getting a personal pension as well, so you can invest up to the annual allowance of £40,000 per year if you can afford it.
You still get extra money added on
Put off by a lack of employer contributions? Then remember that you still get additional money in the form of tax relief every time you pay in. This can make a massive difference: for instance, paying in £80 will instantly transform into £100 in your pension pot, thanks to 20 per cent tax relief. You won’t find instant 20 per cent growth in any other kind of investment.
You may be able to claim higher tax relief
If you’re a higher rate taxpayer you’re entitled to 40 per cent tax relief (so you’d only have to pay in £60 to get that £100 in your pension pot). It’s up to you to claim this additional relief via your self-assessment tax return (or you could hire an accountant to take care of it). If you didn’t know about this and have missed out on previous years, you can reclaim up to three years’ tax relief and really boost your pension savings.
Save even more if your spouse works for you
If you make your spouse an employee of the company, then of course you’ll have to provide them with a workplace pension – which is great news for you both. You’ll be able to make pension contributions to them too and gain additional tax relief, and so boost retirement income for the pair of you. Do make sure however that your spouse is properly employed – just putting him or her on the payroll for tax reasons will get you into trouble with HMRC. Come on, it’s your excuse to boss them around!
Use your pension to buy your premises
This is a neat way to save tax, and is perfectly legitimate. If you have enough money in your SIPP (self-invested personal pension) you can buy the property in which you run your business and keep it inside your pension (you can borrow up to 50 per cent of its value to cover the cost). You then pay market-value rent to the SIPP itself. This puts a great investment (property) into your pension, while also saving on corporation and income tax, and also on capital gains tax when you sell the property. It’s a complex arrangement, though, so be sure to consult a financial adviser about it first.
Carry over your annual allowance if necessary
One of the issues about being self-employed is that income can be unpredictable; a good year can follow several lean years. This means that sometimes you might not be able to make any pension contributions, but sometimes you’ll be able to pay in a lot more. The annual cap is £40,000 (the amount on which you can receive tax relief), but to make hay while the sun shines, you can carry over any unused annual allowance from the past three years.
Find the best personal pension plan for you
Even if you do join Nest, you may well want another pension plan too so you can pay in more each year. An independent financial adviser can search the whole of the market for you to find the best value pension scheme for your circumstances.
If you’ve already got a pension plan but wonder if you could do better, book a free pension check with an adviser.
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