When you’re self-employed, planning for your retirement can often feel like something you’ll tackle ‘later.’ But the truth is, the earlier you start saving for your future, the more comfortable your retirement will be. The UK pension system offers several opportunities, even for those without a traditional employer, to build a decent retirement pot. Here, we’ll guide you through how to make efficient decisions to ensure you’re looked after when you decide to wind down your work.
Why is pension planning important for the self-employed?
Unlike employees, who often have access to workplace pensions where employers contribute, you need to take full responsibility for your pension as a self-employed individual. According to recent data from the Office for National Statistics (ONS), only about 31% of self-employed workers contribute to a personal pension plan. This means that a significant proportion of the self-employed may be underprepared for retirement.
Without a structured pension plan, you might end up relying on the State Pension alone. Currently, the full new State Pension is £221.20 per week based on 35 years of National Insurance contributions (NICs). While this can provide a safety net, it’s often not enough to maintain the same quality of life you’ve enjoyed during your working years.
The challenge of consistent saving
One of the main issues self-employed individuals face is the irregularity of income. When your earnings fluctuate month to month, it can be tempting to put off pension contributions during leaner periods. However, this inconsistency can leave gaps in your savings, meaning less money when you need it most.
But here’s the thing: pension contributions don’t have to be large. Even small, regular contributions add up over time. And, with tax relief from the government, your savings can grow more efficiently than with a standard savings account.
Missing out on tax relief
When you’re self-employed, pension contributions are eligible for tax relief, which means the government adds money to your pension pot. For basic-rate taxpayers, the government tops up your contribution by 20%. For example, if you contribute £80, it will automatically become £100. Higher-rate taxpayers can claim an additional 20% tax relief, making pensions one of the most efficient ways to save for your retirement.
If you’re not contributing to a pension plan, you’re missing out on this valuable opportunity to grow your savings more efficiently. The longer you wait, the less you’ll benefit from compound interest and the government’s top-ups.
Pairing the right pension plan with your financial goals
When it comes to pension planning, there are several options available for self-employed individuals. The key is finding the right balance between flexibility and security to suit your current needs and long-term goals.
1. Personal pension plans
Personal pension plans are the most common option for the self-employed. They allow you to make contributions whenever you can, offering flexibility in times of fluctuating income. You can choose where your money is invested, with options ranging from low-risk to high-risk portfolios. Over time, the aim is for your investments to grow, giving you a comfortable nest egg for retirement.
2. Self-Invested Personal Pensions (SIPPs)
If you’re comfortable making investment decisions, a SIPP gives you more control over where your pension money is invested. This can include shares, bonds, and property. While it offers potentially higher returns, there is also more risk involved. However, for those who are keen to take an active role in their financial planning, SIPPs can be an attractive option.
3. The Lifetime ISA (LISA)
Although traditionally aimed at first-time homebuyers, a LISA can also be used for retirement savings. You can contribute up to £4,000 per year, and the government adds a 25% bonus, giving you up to £1,000 extra annually. It’s important to note, though, that new applicants must be under 40, you can only pay into a LISA up to your fiftieth birthday, and any funds withdrawn before you reach 60 will incur a 25% penalty. This makes the LISA an alternative supplement to your retirement planning.
How much should you contribute to your pension?
This is a question we frequently get asked. While the answer depends on your current earnings, age, and lifestyle goals, a general rule of thumb is to aim to save 12-15% of your annual income towards your pension. If you’re just getting started and find that percentage daunting, start with what you can manage and increase your contributions as your income allows.
It’s worth reviewing your pension savings regularly. As your income grows or your financial situation changes, you may be able to contribute more. Small adjustments now can have a big impact later.
Making time for retirement planning
With the demands of running your own business, it’s easy to put pension planning on the back burner. But setting aside time to consider your retirement is one of the most important things you can do for your future self. There’s no rush, but taking action sooner rather than later means you’ll feel more comfortable as you approach retirement age.
We recommend reviewing your pension at least once a year. This will ensure that your contributions are on track and that your investments align with your retirement goals.
You don’t have to do it alone
At Bulley Davey, we understand that pension planning can feel overwhelming. But we’ve got this. We take the time to listen and pair you with the right options that fit your financial goals. It’s not about selling a product; it’s about helping you get it right.
Our team of advisers is here to offer you personal, tailored advice to make the process effortless. Whether you’re just starting out with your pension planning or looking to review your current strategy, we’re here to ensure you feel looked after every step of the way.
Plan today for a comfortable tomorrow
Pension planning is essential for the self-employed, but it doesn’t have to be complicated or stressful. By taking small, regular steps now, you can build a decent retirement pot and enjoy peace of mind, knowing that your future is secure.
Bulley Davey is here to help you find a solution that works for you. Let’s get started on making sure your retirement years are just as rewarding as your working ones.
Contact us if you need any assistance with pension planning for the self-employed.
Note: The value of your investment may go down as well as up, and you may not get back what you initially invested.