Independence is often cited as the biggest advantage of being self-employed.
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Whilst being your own boss has its merits, it can also create potential problems; most significantly with retirement.
An individual who is self-employed must exercise greater control when beginning their retirement planning.
As they cannot usually benefit from automatic contribution plans, they need to ensure they take their retirement provisions in their own hands.
In the first of this series of articles, we look at how a self-employed individual can save for a comfortable retirement in the United Kingdom.
Saving for retirement in the UK
Office of National Statistics figures show that there are around 4.25 million self-employed workers in the UK as October 2013.
Whilst some individuals may plan to retire entirely on the state pension, with a current value of GBP 110.15 per week, you may want to consider saving for a supplementary income for retirement.
(In addition, self-employed workers are the most likely work group to miss out on receiving their full state pension due to insufficient National Insurance (NI) contributions. Retiring after the 6th of April 2010 means you will need to have 30 years’ worth of NI contributions to receive the full state pension. You should contact HMRC to obtain your NI statement and enlist the help of a financial advisor if you are unsure where you stand on this.)
On average, self-employed individuals miss out an average of GBP 91,512 as they don’t benefit from company pension scheme contributions.
However, any contributions you make will still be topped up the HMRC in the form of tax relief. This means if you are a basic rate taxpayer, every GBP 100 you save will mean a GBP 25 top up from HMRC.
When it comes to choosing a specific plan, there are a wide range of pension choices for the self-employed. You will be able to choose from a wide range of providers, most of which will offer pensions in the following core schemes: Personal pensions, stakeholder pensions and Self Invested Personal Pensions (SIPPs).
As a defined-contribution pension, a personal pension allows you to make your own arrangements for how contributions will be paid.
Your pension will then grow in line with your contributions, the overall investment performance, and the total amount of tax relief your fund receives.
With the standard personal pension schemes, you should note that your investments will be looked after on your behalf. If you require greater control over where your pension is invested, you may want to consider a SIPP which offers a much larger choice of asset classes.
Stakeholder pensions, whilst offered by employers, can also be started by a self-employed individual.
They are a form of defined-contribution personal pension with low (yet very flexible) minimum contributions – meaning if your income is especially volatile year on year, this could be the best option for you.
With these pensions, you can pay in as much or as little as you want every year, and receive tax relief up to GBP 50,000. However for the tax year ending 2015, this will be reduced to GBP 40,000. If you go over these amounts, you won’t receive any tax relief – however you can carry forward any unused allowances for three years.
For self-employed workers, this means that when your income is high, you can maximise your pension savings for that year and benefit from increased tax relief.
As with many complex decisions, it pays to take professional advice. A regulated independent financial advisor (IFA) will be able to outline the common pitfalls self-employed individuals encounter, and also highlight which options would best suit your needs.
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