Pensions advice for self-employed
You can't rely on the state pension for your retirement
It's really important to start planning ahead as soon as possible, so that you can live life the way you want when you retire.
Being self-employed can leave you vulnerable when it comes to your pension. It is very likely you will need another pension, apart from the state pension, in order to retire comfortably.
Our advisers are qualified to offer comprehensive guidance on taking out a personal pension. When it comes to your pension it's important you take proper advice.
How much money do I need in retirement?
Budgeting for retirement can be more difficult than budgeting while you're still working. You'll probably need less to live on as you get older and it's not usual to have out goings like a mortgage. Although you should also consider the possibility that you will be faced with other expenses as you get older.
You will need to consider the following:
- Your retirement age
- How much basic state pension you will receive
- Your expected basic living expenses
- Any dependencies
- Your expected lifestyle (holidays, travel etc.)
- Any assets such as savings & investments and property.
It depends on what you choose to do in retirement to how much money you might need to make it happen.
What is a defined contribution pension scheme?
A Personal Pension is a long-term investment that aims to help you build up a pot of money, designed to offer a lump sum and regular income during retirement. A pension pot based on how much is paid into it is called a defined contribution pension.
There are two main types of defined contribution schemes : a stakeholder pension scheme or a self-invested personal pension plan (SIPP).
Stakeholder pensions are a form of defined-contribution personal pension. They have low and flexible minimum contributions, capped charges and a default investment strategy if you don't want too much choice. You can start one yourself.
Self-invested personal pension plan (SIPP)
A self-invested personal pension (SIPP) is a pension 'wrapper' that holds investments until you retire and start to draw a retirement income. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose.
Your pension provider will claim tax relief at the basic rate and add it to your pension pot. If you're a higher rate taxpayer, you'll need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from a range of funds offered by your provider.
Carry forward unused pension allowance
Pension contributions might be the last thing you consider when you set up a business, but leaving it too long before contributing may make it difficult to catch up in the future.
The cap on how much you can contribute into a pension each year is £40,000, but you can carry forward any unused annual allowance from the previous three years, provided that you were a member of a pension scheme during that time. This doesn't have to be the same scheme to which the contribution is made.
Employ your spouse or family member and boost their pension
If your spouse or a family member works for the company you can make pension contributions worth up to 100% of his or her salary every year. Doing this could boost your joint income in retirement (if it's your spouse) as you can take income from two pots. If they are a basic-rate taxpayer they will get 20% tax relief on the money you contribute, and if they are a higher-rate taxpayer they will receive 40% tax relief.
What if you already have a personal pension?
There's still ways to boost your pension prior to retirement.
Even if retirement isn't far away, there are steps you can take to increase the retirement income you'll receive when you retire. This applies both to your State Pension entitlement as well as to any personal or workplace pension pots that you have.
You still might have time to boost your pension - you have two main options:
Pay in more
Top up your pension pot, whether by adding to an existing scheme or starting an additional one.
Delay the date on which you'll start taking your retirement income.
Maximising your pension contributions in the years before retirement brings an immediate boost in the form of tax relief. This is particularly true if you are a higher-rate tax payer.
The DWP also estimates that 12 million adults below state pension age are heading for an inadequate retirement income.
It's very risky to try to boost your pension pot by investing in higher-growth investments in the run-up to retirement. If the investments fall in value, there may not be time for them to recover before you retire.