The state pension
The first issue for self-employed workers to consider is how they can make sure that they receive the full new state pension
. In order to receive the maximum amount, which currently stands at £164.35 per week, a self-employed worker – of which there are over 4.5 million, or roughly a seventh of the UK workforce
– will need 35 ‘qualifying years’ of national insurance contributions.
You will likely be making class 2 national insurance contributions as part of your self-assessment, but it pays to regularly check your current state pension entitlement. If there are any shortfalls, perhaps because of fluctuating incomes, then there is the option of making voluntary contributions to make sure that you receive the full payment.
What are your pension options?
For most self-employed people, who do not have the option of enrolling in a workplace pension, there will be three main pension choices: a stakeholder pension, a personal pension or a self-invested personal pension (SIPP).
Patrick Connolly, chartered financial planner at Chase De Vere
, points out that a personal pension will be the starting point for many, and notes that while some will prefer the extra flexibility that comes from investing in a SIPP, where you choose precisely where your money is invested, they do come with higher charges.
Andrew Megson, executive chairman of My Pension Expert
, adds there is no “one size fits all” approach and argues that the key is to get expert advice as soon as possible.
Your non-pension options
Patrick points out that self-employed people may prefer to keep the money they are putting aside more accessible in case they really need it, such as by saving through an ISA. The Lifetime ISA, for example, rewards savers with a 25% annual bonus from the government, capped at £1,000 a year, so long as you only use the money as a deposit on a house or for your retirement.
“However, having their money accessible also means that they are more likely to spend it and so it won’t be available when they reach retirement,” he warns.
How much should I save?
Patrick argues that self-employed workers should take a similar approach to pension saving as those who are employed, which means starting early, even if they cannot afford to save very much to start with.
“They can then look to increase contribution levels when they are more confident about the security of their earnings and can potentially add further amounts through lump sum payments if there are spikes in their earnings,” he adds.
Keeping on top of your various pensions
The days of having a job for life are long gone. A study from the Association of Accounting Technicians (AAT) a couple of years ago suggested that we will typically have six different jobs over the course of our working lives
. As a result, it’s easy for people to build up a collection of different workplace pensions, alongside their own private pension plans.
It’s nonetheless important to have a good idea of just how much you have put aside in your various pensions, and how they are performing if you want to make sure that you have enough money set aside to cover you in retirement.
The government is proceeding with plans for a pension dashboard, which will bring together all of the information on your overall pension position.
Andrew Megson, executive chairman of My Pension Expert, recommends making use of the government’s free pension tracing service
in the meantime, as you may have lost touch with the existing pension arrangements from former jobs.
You may prefer to consolidate your various pensions into a single plan
. However, it’s really important that you carefully check what fees may be incurred from doing so, as well as what benefits you would be giving up. You may be better off keeping the pensions separate.
The future of auto-enrolment
The auto-enrolment scheme, where employees are automatically enrolled into a pension by their employer, has been a huge success in getting people to contribute more towards their retirement. According to figures from the government
, almost 10 million workers have now been enrolled in workplace pensions.
Self-employed workers are excluded from the scheme. However, the Department for Work & Pensions has confirmed it is to conduct trials next year looking at ways to encourage more self-employed workers to save in pensions.
According to the government
, these will include better use of technology to help the self-employed “overcome barriers to saving” and promoting saving for retirement in an easily understood way through common points of contact used by the self-employed, such as online accounting systems.
Don’t forget your employees
If you have your own employees, then you will need to enrol them in a workplace pension of their own, as well as contribute towards it.
In the current tax year, employers are required to contribute the equivalent of 2% of an employee’s qualifying earnings into their workplace pension, though this is rising to 3% in April.
The Pensions Regulator has an excellent online tool
to help employers understand their duties, as well as the potential enforcement they face if they don’t comply with the rules.