Rising unemployment is likely to push many people to consider working for themselves so that they can make ends meet.
Being self-employed can be really tough – and even more so during these challenging times – so it’s not surprising pensions often fall to the bottom of the to-do list.
Most people who are employed are automatically enrolled into a workplace pension, but if you’re self-employed, it’s up to you to make your own retirement provision. That can be easier said than done when you’re busy trying to get your business off the ground.
Nearly 5m people in the UK are self-employed, according to the latest data from the Office for National Statistics (ONS) and 2.27m of these are over 50, up from 1.45m 10 years ago. According to recent research by insurer NFU Mutual, which questioned more than 2,000 people about pensions, more than three quarters of self-employed respondents said they do not pay into a pension.
Separate research by Nest, the workplace pension scheme set up by the government, found that 74% of self-employed people think it’s important to save for retirement, but 50% aren’t confident about how they’ll do this.
This may be because self-employed incomes often vary from month to month, so committing to paying in a set amount each month may feel daunting, or because it can be difficult to know which pension to choose if you’re not simply using your employer’s default option.
Here, we explore the different pension options available to you if you’re self-employed
Why pensions matter if you're self-employed
Although you won’t get the benefit of employer contributions if you’re self-employed, the tax breaks on offer still make pensions a great way to save.
The taxman boosts the amount you pay into your pension. For example, if you’re a basic rate taxpayer a £100 contribution into your pension will only cost you £80 thanks to government tax relief. If you’re a higher or additional rate taxpayer the same contribution will only set you back £60 or £55.
Even though it might be a stretch to pay into a pension, it’s important to remember that the State Pension alone is unlikely to provide you with a comfortable retirement. The current State Pension in the 2020/21 tax year is £175.20 per week, rising to £179.60 in the 2021/22 tax year, and with the age at which you can claim it gradually being pushed back, it’s definitely a good idea to have your own retirement savings in place too.
Why it's never too late to start paying into a pension if you're self-employed
If you’re in your fifties or sixties and planning to retire in the next few years, you might think you haven’t got enough time to build up a decent pension pot, but saving for your future is a good idea at every stage of life. Your contributions will still qualify for tax relief and as you’ll be closer to taking your pension, the tax benefits can appear even more attractive. This is because the tax relief stays the same, but you can access the money you put in much sooner than someone in their twenties can.
Your pension options if you're self-employed
There’s a wide range of pensions to choose from if you’re self-employed, so one of the best ways to narrow down your options is by identifying the type of pension that might suit you.
Previous employer pensions
If you belonged to a workplace pension scheme before you became self-employed, you may be able to carry on contributing to your workplace pension. You’ll need to check with the scheme provider to see if this will be possible.
When you pay into a personal pension your money is invested, and the amount you end up with when you retire depends on how much you’ve paid in and how your investments have performed, once any charges have been deducted.
It’ll be up to you to choose the type of funds where your retirement savings are invested, so you’ll need to think carefully about how much risk you’re prepared to accept. Pension providers will make it clear which investments are likely to suit those with a strong appetite for risk and which will be more appropriate for those who are more cautious. As a general rule, the nearer you are to retirement, the lower risk the investments you opt for should be, to help reduce the impact of any stock market setbacks just before you stop work. There are several online investment platforms, sometimes known as ‘robo-advisers’, such as Nutmeg.com, Wealthify.com, and PensionBee.com, which allow you to sign up for or transfer personal pensions and then choose from a range of ready-made pension portfolios designed to suit different approaches to risk. Make sure you read the small print carefully before signing up to one of these services and check the charges so you understand exactly how much you’ll pay.
A stakeholder pension is a type of personal pension that allows you to make small contributions, so may be a good option if you can’t afford to put away a large amount each month.
They are often flexible, so you may be able to stop and start your contributions when you need to. This could come in handy if you’re just getting your company off the ground and you can’t commit to paying in a set amount each month. Charges are capped on stakeholder pensions and they usually offer a default investment fund so you don’t have to decide where your money goes. Most big pension providers such as Aviva and Standard Life offer stakeholder pensions. You can start both Aviva and Standard Life’s stakeholder pension with just £20.
Self-invested personal pensions (SIPPs)
A SIPP is essentially a ‘DIY’ pension, where you choose exactly where your money is going to be invested. SIPPs usually offer a wider choice of investments than other types of personal pension. For example, whereas you’ll typically be given a range of funds to choose from in a personal pension, with a SIPP you’d normally be able to choose individual companies to invest in, as well as a wider range of funds and more sophisticated alternative investments.
This type of pension typically suits people who are comfortable managing their finances and who are experienced investors. There are two main types of SIPP, low cost SIPPs, sometimes known as ‘lite’ SIPPs, and full SIPPs. Low cost SIPPs can often be started with a minimum investment of around £5,000 and you may be able to pick from a range of ready-made portfolios if you don’t want to have to pick investments yourself. For example, Vanguard offers a SIPP with no fund dealing charge and an annual charge of just 0.15%. Retirement savers can choose from Vanguard’s range of 75 low-cost funds and its range of ready-made portfolios designed for retirement, known as the ‘Target Retirement funds. Other options include the Hargreaves Lansdown SIPP which has a higher annual charge of 0.45% but offers a much wider investment choice of more than 2,500 funds and ready-made portfolios. Other providers of good value SIPPs include AJ Bell and Interactive Investor. You can learn more about how SIPPs work in our article Everything you need to know about SIPPs.
Full SIPPs usually have steeper charges than low cost SIPPs, mainly because they provide access to a wider range of investments. According to consumer association Which? full SIPPs are only really suitable for those with commercial interests or large pension funds, and the typical sum invested in this type of SIPP is usually between £150,000 and £450,000.
If you’re not an experienced investor, a stakeholder or personal pension may be a better option than a SIPP.
While pensions can appear complicated, you shouldn’t let this put you off saving, as they can be crucial in allowing you to lead the retirement you’ve worked so hard for.
A good financial advisor can help you navigate this complexity by providing a specific recommendation based on your individual circumstances, enabling you to maximise your retirement savings. If you think this would be helpful you can find a local financial advisor on VouchedFor or Unbiased.co.uk or check out our guide on How to find the right financial advisor for you. If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a free pension check with a local well-rated financial advisor. There’s no obligation, but once you’ve had your check, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.
The downside of using a financial advisor is that they come at a cost. Whilst research has shown that a financial advisor will often make you more money than they cost, especially over long time periods, that is not always going to be the case. If you don’t think your pension will be big enough to make a financial advisor cost-effective, then it might be worth speaking to a few stakeholder pension providers who will be able to talk you through the steps required to get started so you can make your own decision. Alternatively, if you’re comfortable going it alone, you might want to consider a ready-made pension from a robo-adviser. Learn more about how robo advice services work here.
The most important thing is to not put off thinking about your pension, and remember it’s never too late to start saving – pension contributions can still benefit from tax relief until you reach the age of 75.
Are you self-employed and do you contribute to a pension, or are you still deciding which type of pension to go for? You can join the money conversation on the Rest Less community or leave a comment below.