Self-employed? It’s time to think about your pension.

  This article comes to you from Chris Nutt, Advice Team Manager at NFFS

If you’re self-employed, saving into a pension can be a more difficult habit to develop than it is for people in employment. There is no-one to choose a pension scheme for you, no employer contributions and irregular income patterns which can all make saving difficult. But preparing for retirement is crucial for you too.

According to a survey of 2,000 people by National Employment Savings Trust (Nest), the government-backed pensions provider, three quarters of self-employed people think it’s important to save for retirement, and over half would welcome help to do so, according to the same survey.

The first hurdle to overcome is working out how much income you might want in retirement. Financial advisers often divide this up into a series of income layers, ranging from the amount needed for basic survival up to a higher sum, which could include things like dream holidays. This sum will vary by individual. Talking to an independent pensions expert will help put a firm figure on it, though.

As a self-employed person, you have two main options when it comes to saving money into a pension scheme: the UK state pension and a private pension. The amount you can contribute might depend on how much profit you are generating and how much you are able to pay yourself.

For most people, it is worth maximising the amount of state pension they’ll qualify for. To do this you must pay Class 2, and possibly also Class 4 National Insurance contributions. Note that paying some National Insurance is mandatory, assuming profits are over the annual threshold, so in effect it is like a tax.

One useful feature of the state pension scheme is that if you miss several years of contributions, perhaps because you were not working or if your profits were below the minimum contribution thresholds, you can over-pay and “buy back” your missed years which means your state pension will ultimately be higher when it is paid. This can be especially useful for working men and women, who may have taken a break to start a family.

Your state pension is based on your own National Insurance record, which you build up by paying National Insurance contributions. If you’re self-employed, you pay Class 2 National Insurance contributions if your profits are above £6,475 in the current tax year to April 2021. You pay both Class 2 and Class 4 National Insurance contributions when your profits rise above £9,500 in the current tax year.

It is important to check your state pension online regularly, as this will help you plan how much you might receive in retirement. As the rules are fluid and state retirement ages do change, checking your pension will also tell you the date when you will reach the state pension age under the current rules. When you get your forecast online, you can also check your National Insurance record too.

This shows which tax years count towards your state pension entitlement so far, so you can see if you have missed any years that you might want to buy back. The new flat-rate state pension is currently £175.20 per week, £9,110 a year, and then only if you have made full National Insurance contributions, so not everyone will get this amount.

As result, many people will want to top up their pension income with a private or self-invested pension, something we will look at in the next article with the help of National Friendly Financial Solutions’ pension advisers.

https://www.moneyadviceservice.org.uk/en/articles/pensions-for-the-self-employed 

https://www.nestinsight.org.uk/supporting-self-employed-people-to-save-for-retirement/