Self-employment can bring independence and flexibility, but it can also require a strong focus on proactive financial planning – particularly when it comes to retirement.
It’s crucial for self-employed individuals establish a robust pension plant to secure a stable financial future especially as they don’t have an employer-funded pension scheme to fall back on.
Why Pension Planning Is Essential for The Self-Employed
When self-employed individuals don’t have an employer pension scheme, they need to take full responsibility for their retirement savings. Without a carefully considered pension plan, self-employed workers risk facing financial insecurity during their retirement years.
Establishing a pension, not only ensures a reliable income in your retirement years but also offers tax advantages and financial piece of mind.
According to a 2024 report, only 20% of the UK’s self-employed people have a private pension scheme. This statistic highlights the need for more proactive pension planning within the self-employed community.
How to plan for a pension if you are self-employed
Assess your current financial situation
Start by evaluating your income, expenses and any existing savings or investments. This analysis will help you determine how much you can realistically set aside for a pension. For self-employed individuals, income can vary so consider aiming for contributions that are sustainable, even during slower business periods.
Pick the right pension scheme
The UK offers several pension options for the self-employed. Here are the most common:
- Personal Pension Plan (PPP): A standard option where you contribute to a pension fund managed by a provider who invests on your behalf.
- Self-Invested Personal Pension (SIPP): For those who prefer more control over their investments, a SIPP allows you to select a wide range of investments, including stocks, bonds and commercial property.
A financial adviser, like us, can help you understand the specifics on each option including the benefits and potential drawbacks.
Determine your contribution goals
The amount you contribute will depend on your income and retirement goals. Many financial experts recommend aiming to save a percentage of your annual income that’s roughly half your age. For example, if you are 40, consider contributing 20% of your income annually towards your pension.
In the UK, contributions up to £40,000 per year are eligible for tax relief, meaning this strategy can also provide valuable tax savings.
Create a diversified investment portfolio
If you opt for a SIPP or other investment-led pension, diversifying your portfolio is crucial for maximising growth and managing risk. A financial adviser can tailor your portfolio to suit your risk tolerance and retirement timeline, providing a balanced approach to growth and security.
Review your pension regularly
As your business and personal financial circumstances change, it’s essential to revisit your pension plan regularly. There are many factors that can impact your retirement strategy such as life events, changes in tax and economic shifts. Working with a financial adviser for annual reviews can ensure your pension plan remains aligned with your goals.
The advantages of professional financial advice for pension planning
A financial adviser can offer insights into pension strategies tailored for the self-employed. This approach is more personal and will mean that factors like fluctuating income, tax and desired retirement lifestyle will be considered.
An experienced adviser can also help you navigate investment choices and assess tax saving opportunities, allowing you to make informed decisions that optimise your pension growth. They can also provide you with market insights allowing you to make changes to your investments to maximise returns.
Basic-rate taxpayers receive a 20% tax boost on their contributions, while higher-rate taxpayers can claim an additional 20-25% through self-assessment. An adviser will ensure you make the most of these tax efficiencies, reducing your tax liability while at the same time increasing your savings.
Key takeaways for self-employed pensions
- Make sure to prioritise pension contributions over savings accounts. The potential growth in a pension account is far greater, especially with the added benefit of tax relief. Savings accounts are an excellent short-term solution, but they lack the growth potential necessary for retirement planning.
- Plan for flexibility. Given that the income for self-employed individuals can be variable, consider a pension scheme that allows flexible contributions. This will enable you to adjust your contributions based on your business’s cash flow.
- Research pension providers and fees. Different pension providers offer varying fee structures and investment choices so it’s essential to choose a provider that fits your needs. Be mindful of management fees, as these can impact the overall growth of your pension. A financial adviser can help you compare providers.
Taking the time to set up a robust pension plan as a self-employed individual is a critical step towards a secure and comfortable retirement. Working with a financial adviser, like us, can simplify the process, ensuring you have a pension strategy that is tailored to your individual needs and financial goals.
If you would like to explore the options available to you, please get in touch.
*Please note: A pension is a long-term investment, and the value of investments can fluctuate. The tax treatment of pensions depends on individual circumstances and may change in the future. Ensure any investment aligns with your risk tolerance and long-term financial plans.