2 vital things you must know to get the retirement you want if you’re self-employed

According to an article by the Independent in 2020, data from the Centre for Entrepreneurs showed that nearly half a million companies were launched between March and September that year.

It was an increase of 44,500 compared to the same period the year before. While figures for new businesses opened in 2021 have not yet been released, Sky News reported in March that a record number were predicted to open as the UK came out of lockdown.

While this could be good news if you want to be your own boss or build a successful company from scratch, many entrepreneurs could be putting their long-term financial security at risk. Figures released by HM Revenue & Customs show the number of self-employed workers who contributed to a pension fell to its lowest level in 2019/20.

The figures reveal the amount contributed to pensions by the self-employed fell to £830 million, down from more than £1 billion in 2018/19. This could mean that thousands of people who are working for themselves could be putting their retirement in jeopardy.

So, read on to discover what pension options you may have if you’re self-employed, and what you could do to get your pension back on track if you’ve stopped contributions because of Covid.

1. Typically, you could choose from two types of pensions

While being your own boss has many advantages, it also means you’re responsible for building up your retirement pot.

That said, this could provide advantages as you could opt for a personal pension plan (PPP) or a self-invested pension plan (SIPP), the latter providing more options around how you invest your money.

Here’s how they differ:

Personal pension plan

Often known as “private pensions”, the growth of these pensions depends on how much money you contribute and how the investments within your retirement fund perform.

The performance will typically depend on the level of risk you’re prepared to take, so always speak to a financial planner to confirm the right level for you. Remember, while having too much risk could damage your long-term wealth, so could having too little.

Like other pension schemes, the government provides tax relief on contributions made to personal pensions, although this is limited by your Annual Allowance. The allowance is the amount of money you can put into your pension and receive tax relief on, and in 2021/22 it’s 100% of your salary or £40,000 – whichever’s the lower.

As a basic-rate taxpayer, the tax relief means that for every £100 you contribute, you’ll typically pay £80. If you are a higher-rate or additional-rate taxpayer, every £100 could cost you £60 or £55, respectively.

Self-invested personal pension (SIPP)

SIPPs are a popular form of retirement plan for the self-employed. Like a personal pension, SIPPs typically have the same tax relief subject to your Annual Allowance.

An advantage of having a SIPP is that you could have more control over the investment funds that are within your pension. This is because you create your own investment portfolio, unlike a personal pension plan that has investments that the pension provider has typically chosen.

In addition, you could place other assets within a SIPP. For example, you may want to consider placing your business premises into your retirement fund as it could boost your pension pot.

That said, care should be taken as some assets may fall foul of pension regulations. Always speak to a financial planner to ensure a SIPP is right for you, and any assets within it meet government regulations and fit with your retirement strategy.

2. You could get your pension back on track if you’ve stopped contributing

If you are self-employed or own a limited company, and have stopped contributing to your pension because of the uncertainty caused by Covid, a financial planner could help get it back on track.

The following are four ways this might be achieved:

Increasing your contributions – by increasing the amount you put into your pension, you could make up for the period you were not contributing, helping ensure you can enjoy the retirement you want.
Delaying retirement – if increasing contributions is not an option, a financial planner could help you understand how much longer you may need to work for in order to enjoy the lifestyle you want when you retire.
Ensuring tax efficiency – by ensuring you are receiving all the tax relief you should be and using your pension tax breaks as effectively as possible, you may be able to boost your pension pot.
Switch investment funds – it might be possible to expose your pension to greater growth potential if you switch investment funds. Always speak to a financial planner before doing this, to ensure you understand any increase in investment risk, and whether you could lose existing pension benefits you may want to keep.

Get in touch

If you are self-employed or own a limited company and would like to discuss your retirement plans and pension options, email us on hello@ardentuk.com or call on 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article. Contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would impact the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.