Self-employed pensions: Making retirement work for you

The UK is in the midst of an entrepreneurial boom. The level of self-employment surged from 3.8 million in 2008 to almost 5 million today, according to the Office for National Statistics.

While this trend is among the defining characteristics of the post-financial crisis economic recovery, it also presents a retirement challenge. Because, as the volume of people working for themselves has risen, the number paying into a personal pension has plummeted, with almost half (45%) of those aged 35-54 having no private pension wealth at all.

Here, we assess two of the major retirement savings vehicles available to you if you are self-employed.

SIPPs

While the state pension remains the bedrock on which most people’s later years are built, for most it is not enough to sustain the retirement lifestyle they want. As a result, you’ll probably want to build a private nest egg to supplement your state pension income.

Self-Invested Personal Pensions (SIPPs) have grown to become one of the most popular retirement saving vehicles in the UK and are worth considering if you’re self-employed.

The key word with a SIPP is flexibility. When you are making contributions you can pay in regular amounts or one-off amounts depending on your circumstances. The range of investment is typically much wider than a standard personal pension. And when it comes to taking money out (after age 55), you can take it all in one go, on an ad-hoc basis or phased over several years. This could be perfect for self-employed individuals who may want to scale back their work commitments or have a financial buffer in place for the months where business is slower.

As it is a personal pension scheme, you also get tax relief on contributions at your marginal rate, so if you’re a basic-rate taxpayer your £80 pension contribution will be topped up with an extra £20 from the Government - if you’re a 40% taxpayer you’ll be able to claim another £20 through your self-assessment tax return.

Remember, however, that you cannot pay contributions of more than your earnings in a tax year. For most people pensions are subject to an annual contribution allowance of £40,000 and a lifetime benefits allowance of £1,055,000 – save any more than that and you could be hit with severe tax charges.

Find out more about our SIPP

Lifetime ISA

The Lifetime ISA could also be a viable retirement savings vehicle if you’re self-employed. The product will allow anyone age 40 or under to pay in up to £4,000 a year, and receive a Government bonus of 25% up to £1,000 – equivalent to basic rate pension tax relief.

You can keep paying in until age 50, and withdraw your money and pay no tax at all from age 60.

You can also take your money out before age 60 to pay towards your first home provided it is worth £450,000 or less, or if you face serious ill health problems, without any penalty. However, if you access your fund early for any other reason you’ll be hit with a 25% Government-imposed early withdrawal charge.

Find out more about our Lifetime ISA