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Self-employed and pensions - April 23rd 2024

Three quarters of self-employed people are not contributing to a pension at the moment, a survey by an investment platform has found. And half of self-employed people have never even started a pension scheme. The figures emerged from a survey of around 9,000 workers by Interactive Investor.

A prime reason why many are not making pension payments is continuing financial pressures and rising debt. Self-employed people often have uncertain income and no entitlement to sick pay and holiday pay. While most employees are now saving into a pension following the introduction of auto-enrolment, the self-employed are not covered. The largest numbers of self-employed individuals fall into the 45-54 age range, so pension provision becomes an even higher priority.

There are many benefits to paying into a pension and the earlier you start, the less you have to put away each month to build up a sizable fund. For the self-employed, the lack of employer contributions means your savings have to work even harder.

  • Tax relief is given on pension contributions of up to £60,000 a year. For every £100 you pay in, HMRC will add £25. If you are a 40% taxpayer, you can in addition claim £25 against your own tax bill. An additional rate taxpayer will get £31.25. Scottish taxpayers may receive slightly more relief because tax rates on earned income are higher.
  • Your fund will be broadly free of tax on its investment income and capital gains.
  • When you take the benefits up to a quarter of the fund is normally tax free, although the pension income will be taxable.
  • You can draw your funds flexibly from age 55 (rising to 57 in 2028).
  • There is no longer any limit to the amount you can hold in a tax-favoured pension scheme without triggering a tax charge. However, all tax-free lump sums, including death benefits, are tested against a lifetime limit, currently £1,073,100.

The combination of tax relief on contributions, tax-free growth within the fund and the ability to take a tax-free lump sum on retirement makes a pension plan an attractive savings vehicle. However there may be benefits in supplementing a pension plan with an individual savings account (ISA) or other investments.

It is important to factor your retirement into your finances because the State pension will only provide a low base income. Currently you can receive your State pension from age 66, but that age will increase from 2026 for people born after April 1960. With an aging population there is no certainty that annual uprating of the State pension will keep pace with earnings. Remember you need 30 qualifying years of national insurance contributions or credits to receive the full new State pension.

Your retirement is likely to last many years, so making provision is an important factor for self-employed finances. You need to consider how much income you will need, your present age and the age at which you wish to retire. Many advisers recommend that your pension pot should be worth six times your income by age 50 and eight times income by age 60, based on projected retirement at age 67.

Whatever your financial commitments – mortgage, children, student loan repayments etc – plan ahead to provide for a time when you cannot, or no longer wish to, work.