For many people, being self-employed is a great option. However, there are steps to take to ensure that there is a plan in place for later life. 

Being self-employed means that you don’t get automatically enrolled into a workplace pension or have extra contributions paid by your employer.

Even if retirement is a long way off, it’s important to think about how you can get the retirement you want further down the line.

Oakworth Financial Planning has put together this guide on how to create a self-employed pension plan, so you can have some peace of mind. 

What is a Pension?

A pension is a pot of money that you can pay into, with the aim of providing you with income when you come to retirement age. 

Once you have reached the age of 55 (57 from April 2028), you’ll be able to access your pension by either withdrawing cash or purchasing an annuity. 

Do I Need a Pension if I’m Self-Employed?

​​It may be difficult to think about the future when you’re self-employed, as you have the day-to-day needs of your business to worry about. However, it’s never too late to start. 

If you’ve been paying National Insurance, you may accrue State Pension benefits. These are a good foundation for when you retire, but they might not be enough on their own. This is because the maximum full rate of the new State Pension (from April 2022) is currently £185.15 a week and the State Pension age is rising.

You might think that you will continue to work beyond the retirement age, however, there may be a time when you simply have to retire or give up work. So, making the smallest monthly contributions can still grow to a sizeable pension pot over the years. 

How Does a Self-Employed Pension Work?

Creating a self-employed pension plan is similar to setting up a personal pension. 

Each year, your pensions have an ‘annual allowance’ for contributions that are eligible for tax relief. The annual allowance is currently set at £40,000, or 100% of your income if lower than £40,000, in that tax year.

Self-Employed Pension Plan Options

The most popular self-employed pension plan is a personal pension. This is where you can add regular contributions or one-off payments into your self-employed pension. Your pension provider will claim 20% tax relief on your behalf and add this to your pension pot. 

For example, if you paid £80 per month, then the contribution will be topped up to £100 if you include the tax relief. This is because £20 is the amount that the government would have collected in tax. 

How much you get back, completely depends on how much you pay into your pension, the risk you take, how well your savings perform, and the level of charges you may pay. 

There are three types of personal pensions that you can choose from for your self-employed pension plan. 

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Ordinary Personal Pension

Ordinary personal pensions are a good way to save for retirement and are the most popular option for self-employed people. 

Most large providers offer personal pension plans and are an alternative to workplace pensions. 

Stakeholder Pension

Stakeholder pensions plans are good if you want to invest within a set charging structure (1.5% cap for the first 10 years and 1.0% after). You can also select the default investment strategy, which can be helpful if you don’t want to decide your own investment options.  

Self-Invested Personal Pension (SIPP)

A self-invested personal pension works in a similar way to an ordinary personal pension, however, some schemes will give you a much wider choice of investments (such as direct shares and commercial property). You can manage these yourself, or you can get some support from a financial adviser. 

Consolidating your Pensions

If you’re self-employed and want to set up a personal pension, you could consider consolidating any other pension pots together, such as old workplace ones. This will make them easier to manage and contribute to. 

It’s a good idea to do this if the various pots aren’t working hard enough for you. As well as this, you’ll gain control of how your money is invested and have more flexibility in the investment options. 

However, consolidating pension pots might not be for everyone, as you may find that previous workplace pension schemes have valuable benefits that would be costly to give up. 

Elderly couple

Top Saving Tips for Self-Employed People

Start Saving Early 

The earlier you start saving, the better. But, it’s never too late to start. The longer the money is invested, the more potential it has to grow. 

Find the Best Self-Employed Pension Pot for You

Look at your options and work out what works best for you. If you need help choosing a pension plan, get in touch with Oakworth Financial Planning, and we can provide support. 

Be Careful with Investments

The investment choices you make will have a huge impact on the amount of money you have to retire on. If you’re selecting them yourself without any help from an advisor, make sure you don’t invest in anything you don’t understand.

Increase Your Pension Contributions

Every year or so, review your regular pension contributions and weigh up whether you can afford to increase the level you pay into the pot. A small increase over time can really make a big difference. Also, don’t be afraid to put a lump sum payment in there if you find that you have any extra to spare.

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Seek Independent Financial Advice 

Setting up a self-employed pension pot can be complex, so it’s completely normal to seek independent financial advice. 

At Oakworth Financial Planning, we can make sure you are on track to achieve your retirement goals and ease any worries or concerns you may have. 

So, get in touch with us today, our expert financial advisors are here to help, and all initial chats are free of charge!