‘How can the self-employed boost their retirement savings?’
I read a lot about the savings options for people in work (auto-enrolment, etc) but little about the alternatives for self-employed people like me. Given I miss out on matched employer contributions is there anything I can do to boost my retirement savings?
Tom Selby, AJ Bell Senior Analyst says:
While self-employed workers miss out on auto-enrolment, there are various options available to boost your retirement.
Let’s start with the obvious ones. Pensions like SIPPs are an attractive retirement savings vehicle for most people, including the self-employed.
If you pay £80 into a SIPP it will be topped up to £100 automatically through tax relief, while you can also claim a further £20 through your tax return if you’re a higher-rate taxpayer and £25 if you’re an additional-rate taxpayer.
Most people can pay in £40,000 a year (note you can’t contribute more than your income in any given tax year), although this may be lower if you are a very high-earner or have already accessed your pension flexibly.
If you invest your money you’ll have the opportunity to benefit from compound growth over time too – particularly if you reinvest those dividends.
You also benefit from tax-free investment growth and total flexibility over how you take money out from age 55, with a quarter available tax-free and the rest taxed in the same way as income. On death SIPPs benefit from generous tax treatment too and can be passed on tax-free if you die before age 75 (and at your beneficiaries’ marginal rate if you die after 75).
Lifetime ISAs are an interesting, more flexible retirement savings alternative which may appeal to you. If you’re aged 18 to 39 you can save up to £4,000 a year in a Lifetime ISA and the Government will automatically add a 25% bonus (the same as pension tax relief if you’re a basic-rate taxpayer), up to a maximum of £1,000 annually.
You can take your money out at any age to buy your first home worth £450,000 or less, or if you become terminally ill. Otherwise any withdrawals before you turn 60 will incur a 25% Government exit penalty, meaning you might get back less than you put in.
If you own your own business you might also want to consider paying your salary directly into your pension. This would no longer count as profit and so could reduce your corporation tax bill as well as being free of income tax.
However, HMRC may question if your total salary and benefit package is excessive, so it’s worth speaking to a financial adviser or accountant before going down this route. Note this option isn’t available if you’re a sole trader, although you can still make personal pension contributions.
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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.