If you’re self-employed, it’s essential that you take the initiative to save for retirement, as you won’t have the luxury of being enrolled in a company pension plan. However, tackling your own pension provision can be overwhelming, especially when you have to manage a fluctuating income and run your own business. Shockingly, nearly half of freelance and self-employed workers, 45% to be precise, are not currently saving into a pension, according to recent research conducted by the Association of Independent Professionals and the Self-Employed.
But here’s the good news – you can start saving for your pension for as little as £50 per month, and it’s important to start somewhere. It’s crucial to generate additional income in addition to the full new flat-rate state pension, which currently stands at £203.85 per week or £10,600 per year, provided you’ve made enough national insurance contributions.
According to Becky O’Connor, Director of Public Affairs at PensionBee, “If you are self-employed, pensions are still worth it. You might not get contributions from your employer but you will still get tax relief on contributions. This is an instant uplift on what you put in.” As a basic-rate taxpayer, tax relief means that it costs you £80 to pay £100 into your pension, while higher-rate taxpayers only need to pay £60 to contribute £100 to their pension fund.
Now, let’s delve into the various options you have when it comes to choosing the right pension plan. You can opt for a personal pension that offers a selection of pre-made plans tailored to different types of savers. If you choose a stakeholder pension, your contributions will typically be invested in a default fund. On the other hand, a self-invested personal pension (Sipp) affords you greater investment flexibility, allowing you to choose from individual shares and investment trusts. This type of pension is more suitable for individuals comfortable with making their own investment decisions.
When selecting a pension provider, you’ll find a range of simple personal pensions offered by digital providers. Online platforms like PensionBee and Penfold specifically cater to the self-employed and even give you the option to consolidate your existing pensions into one plan if desired. Other investment providers offering personal pensions include Nutmeg and Wealthify. For those seeking greater investment opportunities, investment platforms like AJ Bell, Hargreaves Lansdown, and interactive investor allow you to choose from thousands of funds and investment options. However, it’s important to note that transferring old pensions into your current plan may not always be the best decision. If you’re unsure, seeking professional financial advice is highly recommended.
Before settling on a personal pension plan, it’s crucial to evaluate your risk profile. Generally, the closer you are to retirement, the less risk you should take. Additionally, assessing the fees and level of flexibility offered by different pension providers is essential. Look closely at the charges, as they can impact the size of your retirement savings over the years. Charges can be either a percentage of your pot or a fixed fee. Make sure to consider flexibility as well. Find a personal pension provider that allows for flexible payments, as this may align better with your irregular income. This way, you can make contributions whenever you receive substantial payments.
While pensions are a popular option for retirement savings, they are not the only choice available. Stocks and shares individual savings accounts (ISAs) provide an alternative. Keep in mind that ISAs do not offer tax relief on contributions but provide more accessibility to your funds. You can invest up to £20,000 in an ISA during the current tax year.
Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, suggests considering lifetime ISAs (Lisas) as another valuable option. Lisas offer a 25% bonus, similar to basic-rate tax relief on a pension. You can use a Lisa to save for later life or purchase your first home. To open a Lisa, you must be between 18 and 40 years old, and you can deposit up to £4,000 annually until the age of 50. The government adds a 25% bonus to your savings, up to a maximum of £1,000 per year. However, if you need to access the money you’ve saved in a Lisa, you’ll be subject to a 25% penalty.
It can be challenging to find the extra funds for pension contributions, especially when faced with rising living costs. Nonetheless, contribute whatever amount you can afford, whenever possible. Completely stopping contributions can significantly impact your retirement income in the long run, especially if you fail to resume payments. Additionally, don’t be discouraged by stock market downturns. These periods present opportunities to acquire more investments, so contributing to your pension during rocky periods may ultimately boost your returns.
Ultimately, the amount you accumulate in your pension will depend on the total contributions you’ve made over the years and the performance of your investments after deducting charges. To gain a better understanding of the potential income you may receive based on your monthly pension contributions, you can utilize the pension calculator provided by MoneyHelper.
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