Self-employed? Don’t forget to set up a pension
Self-employment comes with the benefits of being your own boss – you can set your own hours, workload and work from wherever you’d like.
However, it also comes with the paperwork that your boss would otherwise handle. While the focus can quickly shift to taxes, it’s crucial not to forget to set up your own pension.
According to PensionBee, only 16 per cent of those who are self-employed pay into a pension. While you can claim state pension, this is unlikely to be enough to sustain a comfortable retirement.
By contributing to your own pension you’ll have more options once you decide to stop work, and you’ll also be able to access it a lot earlier – currently from age 55, and from age 57 from 2028.
On top of that, you’ll benefit from tax relief in the form of a 20 per cent top-up for basic taxpayers, and 40 per cent for higher-rate taxpayers.
Types of pensions for the self-employed
Setting up a personal pension can feel like a big task, and while it definitely won’t come without paperwork it’s not as hard as it may feel.
There are two main types of pensions you can opt for if you’re self-employed – personal pensions and self-invested personal pensions, or SIPPs. You could also opt for a Lifetime ISA.
Everyone gets a £60,000 annual allowance for tax-free pension contributions, including the self-employed.
Personal or private pensions are available from various pension providers, including familiar names such as Standard Life, Aviva, AJ Bell and Hargreaves Lansdown.
These pension funds will be run by a fund manager – all you need to do is set up a contribution. They will charge a fee, and likely have limits on the minimum you can save.
There are private providers to choose from, but you can also join the National Employment Savings Trust, a government-backed pension provider.
SIPPS, as the name indicates, are a bit more hands-on. If you don’t know much about investing, they may not be for you.
SIPPs allow you to pick your own investments, and platforms such as interactive investor give you thousands of options to choose from to create an investment portfolio, as well as quick-start options.
Lifetime ISAs allow you to contribute up to £4,000 a year, with a 25 per cent top up from the government. The income is tax free. This is a far smaller allowance than the one available for pensions, but nevertheless, they might be a useful tool for those earning smaller amounts when their businesses are just starting out.
Additionally with LISAs, you need to wait until you’re 60 to be able to access it penalty free. If you access it before that, you’ll pay a 25 per cent exit penalty. Another thing to consider is that you only receive the bonus until you’re 50, whereas SIPPs allow you to receive tax relief until the age of 75.
LISAs do have a key advantage: any income taken from them is tax-free, compared to only up to 25 per cent from a SIPP where you’ll have to pay income tax on the rest.
There is no one-size-fits-all – make sure the option you go with lines up with your appetite for risk and involvement.
Whatever you choose, make sure you don’t get caught up in the day-to-day business of running your business and forget about saving for your future. And make sure you find the right SIPP for your portfolio size as fees tend to vary.
| Portfolio value | £20,000 | £100,000 | £250,000 |
| interactive investor* | £120 | £204 | £204 |
| AJ Bell | £89 | £284 | £472 |
| Charles Stanley Direct | £180 | £300 | £600 |
| Fidelity | £135 | £310 | £385 |
| Hargreaves Lansdown* | £162 | £497 | £834 |
| Bestinvest | £150 | £430 | £1,030 |