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  • Jaskarn Pawar

How to save for retirement if you’re self-employed

Updated: Mar 12


Being self-employed comes with many perks, but it will mean you need to take more responsibility for your income and financial security too. From managing incoming work through to submitting tax returns, there are extra tasks you’ll be faced with. One of them is organising your pension.

Most people traditionally employed will now benefit from auto-enrolment. As a result, the number of people saving for retirement has seen a huge surge, but this has yet to be extended to the self-employed. Figures from the National Employment Savings Trust (NEST) estimate that just 24% of self-employed workers are actively saving into a pension and 55% want more guidance on how best to save for retirement.

With over 15% of the UK workforce now self-employed, the lack of pension savings could mean millions face financial insecurity in their later years. The good news is that it’s never too late to start saving for retirement and there are steps you can take to boost your pension.

Why use a pension to save for retirement?

The money contributed to a pension is locked away until you reach retirement age. Currently, pensions become accessible at 55 but this is expected to rise alongside the State Pension age in the coming years.

When you’re self-employed, your income may fluctuate and there may be periods where you’re not earning an income. It can mean that locking money away for potentially decades can be a daunting prospect. Yet, a pension remains the most efficient way to save for most people.

There are three key reasons for this:

1. Whilst you won’t receive employer contributions topping up your pension, you will still receive tax relief. Assuming you stay within the limits of the Annual Allowance, you’ll receive tax relief at the highest rate you pay Income Tax. It’s an advantage that can help your pension grow at a faster pace.

2. Pensions are usually invested and over the long term, this helps your savings grow. Over the decades you may be saving for retirement, investing can help your savings outpace inflation to deliver returns. As you can’t access these returns, you’ll also benefit from the compounding effect.

3. Returns generated through investments held in a pension aren’t taxed either. Instead, your income is taxed when you start making withdrawals.

7 tips for building your retirement pot

1. Set up regular contributions

Regular payments throughout your working life add up. Getting into the habit of making consistent contributions to a pension can lead to security in later years.

This is something that many self-employed workers recognise. Some 56% said they favoured the idea of automatically diverting a portion of their income to saving for retirement. Whilst this is a key part of auto-enrolment for employed workers, you’ll need to take a more proactive approach. It can be as simple as setting up a standing order for the end of each month, so you don’t even have to think about it.

Keep in mind, though, you won’t be able to make withdrawals from your pension before you reach retirement age. Ensure you’re putting away an affordable amount.

2. Contribute more when you can

Affordability is a crucial part of building up your retirement income. If your income fluctuates throughout the year, set up regular contributions based on what you know you can afford.

However, don’t leave contributions there. In the months where you receive a higher income, divert a greater portion to your pension for a retirement boost. Alternatively, you may want to contribute a lump sum at tax year end. Making a one-off payment to your pension is usually simple and can be done online in most cases.

3. Understand pension investments

How is your pension invested?

There are numerous options for self-employed workers, from using NEST, a workplace pension scheme set up by the government which allows you to choose a fund, to a Self-Invested Personal Pension (SIPP) if you’re confident choosing your own investments. What’s right for you will depend on your circumstances and investment knowledge.

Whatever options you choose, understanding your investments is important. All investments involve some level of risk and you need to ensure it aligns with your risk profile. This will depend on a range of factors, including how far away retirement is, the other assets you hold and overall attitude to risk. Understanding the risk and expected returns of your investments support retirement planning.

4. Keep track of your pension

Regular retirement contributions are important for building your pension up. However, your involvement shouldn’t stop there. Keeping track of how your pension is growing is just as important.

Areas to keep an eye on include investment performance and fees. Here, it’s crucial that you look at the bigger picture. At times, investment volatility will mean investment values fall. But when you take a long-term view you should see your pension gradually rising to reach your goals, thanks to contributions, tax relief and investment performance.

5. Recognise other assets can be used in retirement too

Pensions are an efficient way to save for retirement but it’s not the only asset that can be used to create an income or capital once you give up work. Where flexibility is needed, these other assets can provide peace of mind. They could include investments held in ISAs (Individual Savings Accounts), property or an emergency cash fund.

Take some time to understand how these might provide for you in retirement and whether you’re getting the most out of your capital. It’s a step that can provide confidence as you plan for retirement.

6. Check your National Insurance contributions

The State Pension might not be enough to retire on alone but for many, it’s an important foundation for creating a financially stable retirement income.

To qualify for the full State Pension, which will be £9,110.49 annually in 2020/21, you’ll need 35 years on your National Insurance record. It’s worth looking at how many qualifying years you already have and consider how long you expect to continue working. It is often possible to fill in the gaps if necessary, to boost the amount you’ll receive when you’re retired.

7. Speak to a financial adviser

Pulling together the different aspects of retirement planning can be difficult. How much do you need to retire comfortably? Should you increase your pension contributions? What income can you expect in retirement?

Working with a financial planner whilst still working can help make sure you’re on track to meet retirement goals. It’s a step that can address where gaps are and what you need to do to bridge them. Please contact us if you’re self-employed and have questions or concerns about your retirement. Whether you’re already paying into a pension or have yet to open one, we can help create a plan that allows you to achieve the retirement you’re looking forward to.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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