How to start a pension when you are self-employed

Going self-employed is becoming increasingly attractive to many people, however, there's much more to self-employment than taking long lunches and setting your own dress code! For example, you will need to figure out how to start and pay into your pension without the help of your employer.

Under the Government's National Employment Savings Trust (NEST), all companies must automatically enrol their eligible employees onto a suitable pension. This scheme allows employees to benefit from automatic pension payments alongside employer contributions and government tax relief.

However, if you are self-employed, you are not automatically enrolled onto a pension scheme. It is your responsibility to set-up and pay into a pension of your choice. Here's what you need to know about pensions for the self-employed and why retirement planning is so important!

The benefits of setting up a pension

If retirement is still quite a way off for you, making monthly pension contributions may seem unnecessary. Nevertheless, starting a pension early is very sensible. The more you save now, the more you will have to live on when you retire.

You may be wondering whether to choose between a pension or savings ISA, which are two of the most popular options for people who want to protect themselves financially without investing in property. While there are pros and cons to each, one benefit of setting up a pension is that you will be entitled to tax relief from the Government. This is a benefit offered to both employed and self-employed people and is probably worth taking advantage of.

Under the current tax year (2020/21), you can receive tax relief on pension payments of up to 100% of your annual earnings or a £40,000 yearly pension allowance (whichever is lower). This allows basic-rate taxpayers to receive £25 for every £100 they pay in and higher-rate taxpayers to claim another £25.

Are self-employed people entitled to a State Pension?

Self-employed people are entitled to a State Pension - but it may not be enough to live on comfortably. The new State Pension is £175.20 per week, but what you receive will depend on your National Insurance record.

Relying on State Pension as your sole source of income after retirement doesn't offer much flexibility as you will need to wait until you have reached State Pension age to start claiming it. Before you start retirement planning, it's worth checking your State Pension age and how much you are predicted to receive via the Government website.

Setting up a pension when you are self-employed

One of the most effective ways to protect yourself financially in the future is to set up a personal pension. This will bolster the funds you receive as part of your State Pension. To maximise your saving opportunities and take advantage of the available tax relief, it's important to set up a pension as early as possible.

There are two main options when it comes to pensions for the self-employed: personal pensions and Nest.

Personal pensions for the self-employed

When you pay into a personal pension, your money will be invested into funds by the provider. How and where your money is invested will often be determined by your pension provider, so it's important to choose the right one for you.

With a personal pension, you can decide whether to make set monthly payments or contribute on an ad hoc basis. This flexibility can be attractive to people who are self-employed and don't have a set salary. If you choose a pension provider that has registered with HMRC, then you will still be able to benefit from government tax relief.

How much you get back from your pension will depend on how much you pay in, how your investments fare, and how much you pay in charges. How your investments perform and the charges you pay will depend on whether you opt for a stakeholder pension (your provider will decide where your contributions are invested) or a self-investment personal pension (you can choose where your money is invested).

Nest pensions for the self-employed

If you don't want to pay into a personal pension, then you can check whether you are eligible to sign up to Nest. This is the Government's auto-enrolment scheme that employers use to contribute to their employees' pension pots.

Once you have signed up to the scheme, you will need to make your own payments (with a minimum of £10 every time you pay) and any basic rate tax relief will be claimed automatically on your behalf. The scheme offers very affordable charges but doesn't give you as much freedom to choose which funds you contribute to.

For expert retirement planning advice, look no further than Keith Graham's Chartered Accountants. You can trust us to offer bespoke advice regarding pensions for the self-employed, retirement planning and much more. Contact our Aldershot-based accountants today to get started.