Starting a pension early means that you can potentially benefit from higher returns and compounding on your savings. So, when you come to retire, you can draw a healthy income to fund your lifestyle.
Unfortunately, data reported in FTAdviser shows that if you are self-employed, you may not be contributing enough to your pension. This could affect the quality of your retirement.
Indeed, less than 20% of self-employed people are paying into a pension, compared with around 80% of private sector employees.
Ultimately, this means that you could have a serious shortfall in retirement income if you are self-employed.
That’s because, although you will likely receive some State Pension, this may not provide enough income for you to reach your retirement goals. As a result, you may have to make sacrifices to your lifestyle or potentially push back the date of your retirement.
Fortunately, if you take some advice and start planning now, you can likely still build your pension savings and achieve the lifestyle you want in retirement.
Read on to learn about why you could be behind on pension contributions if you are self-employed, and how you can make up the shortfall.
Self-employed people are 44% less likely to save into a pension than employees
Since the introduction of auto-enrolment, most employees are now paying into a pension. But without a similar scheme for the self-employed, you may not be making the necessary retirement provisions.
Even those who are making regular contributions may not be paying enough into their pension to fund their desired retirement lifestyle.
That’s because self-employed people are also less likely to increase contributions as their earnings increase. Almost a quarter of the people surveyed chose their contribution as a round number, rather than a percentage of their earnings, with the most common contribution being £50 a month.
And, 23% of self-employed people who paid into a pension for nine consecutive years did not increase their contributions in that time.
This contrasts with employed people who normally pay their contributions as a percentage of their income. As a result, their contributions increase along with their earnings, meaning their pension savings often grow faster over time.
If you are self-employed, you may want to consider the pensions gap and how it may affect you. The good news is, there are several things you can do to build a secure retirement.
5 ways the self-employed can build a secure retirement
- Pay into a personal pension
Auto-enrolment means that employed people automatically start making pension contributions unless they actively opt out, but this is not the case for the self-employed.
Fortunately, you can set up your own personal pension and start making contributions right away. One of the main benefits of this is that you receive basic-rate tax relief from the government on your contributions – up to your Annual Allowance of £60,000 – in the same way as a workplace pension. However, any contributions that exceed your Annual Allowance may trigger a tax charge.
You’ll also be able to claim higher- or additional-rate relief if you pay a higher rate of Income Tax.
Additionally, if you are the owner of a limited company, payments into your pension are considered employee contributions. As a result, they are deducted from your total profits as “allowable expenses”, meaning you may be able to reduce your Corporation Tax bill.
You may also pay reduced National Insurance contributions (NICs) if you are an employee of your own limited company and you make pension contributions. That means you can build your retirement savings while also potentially reducing your tax bill.
If you start making these contributions as soon as possible, even if they are small, you could benefit from tax relief and potential investment returns over a longer period. This can make a significant difference to your income and quality of life in retirement.
- Claim lost pension pots
The Pensions Policy Institute (PPI) reports that there are over 3 million “lost” pension pots with a total value of £26.6 billion.
That means, if you were previously employed and paid into a pension, you may have unclaimed savings that you could add to your retirement pot.
Fortunately, you can check whether you have lost pension pots by getting in touch with previous employers and asking whether you made pension contributions. The government also provide an online service to help you find pension contact details and reclaim any lost savings.
- Maximise your State Pension entitlement
While it may not be a good idea to rely solely on the State Pension to fund your retirement, it is a guaranteed payment that can boost your income.
However, you may not receive the maximum State Pension – £203.85 a week in the 2023/2024 tax year – if you have gaps in your National Insurance (NI) record.
That’s because, normally, you receive an NI credit for each year that you earned £6,725 and paid NICs, and you need 35 years’ worth of credits to receive the full amount.
But if your profits were particularly small, you took time out of work, or you lived abroad, you may well have gaps in your NI record.
The good news is, you can buy additional credits to fill these gaps and meet the 35-year threshold. That’s why you may want to check what your State Pension entitlement is and fill any gaps to ensure that you get the maximum payment.
- Plan your exit from the business
Many self-employed people rely on their business as their retirement, which can be a risk. While your business may remain profitable for years to come, there are no guarantees.
It is also important to consider how you plan to use the business to fund your retirement. For example, will you sell the business and live on the proceeds, or appoint somebody to run it and continue drawing income? Do you have a backup plan if the business fails?
Often, the reason that self-employed people fall short in retirement is that they assume the business will provide adequate income without knowing exactly how.
That’s why you may want to consider your exit from the business now and, most importantly, explore other options for funding retirement so you are prepared for uncertainty.
- Seek advice
If you’re self-employed and are concerned about your retirement, working with an adviser is perhaps one of the best things you can do.
We can help you understand different personal pension options, investments, and strategies for your business.
Additionally, we can make your wealth as tax-efficient as possible, so more of your money goes in your pocket that you can then use to build your retirement savings.
Get in touch
Even if you are yet to start planning for retirement, there is still plenty that you can do to ensure that you’ll live the lifestyle you want in future. Get in touch today and we can talk through your options with you.
Email hello@fcadvice.co.uk or call 0330 828 4714.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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 have an impact on 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.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
