If you're self-employed, you'll still be entitled to the basic State Pension when you retire, just like everyone else. But will it be enough?
Consider that the current full basic State Pension is worth £113.10 a week – and that requires at least 30 years of National Insurance contributions. So it’s fair to say you’ll probably need another nest egg. So it’s worth considering your own pension plan.
Workplace pension schemes for employees receive contributions from the employer as well as the employee. But if you’re self-employed, you obviously won’t have a boss to add to your fund. However, HM Revenue & Customs (HMRC) will help you out in the form of income tax relief: if you pay tax at the basic rate, HMRC will add an extra £25 to your pension fund for every £100 you pay into it.
### Which type of pension?
There are a number of different pension schemes you could consider, including standard personal pensions, stakeholder pensions and self-invested personal pensions.
Personal pensions are investment policies offering a lump sum and/or regular income for your retirement. They are “defined contribution” schemes (also known as “money purchase” schemes), whereby you make regular payments into your fund and the money is invested by the pension provider on your behalf. The provider deducts fees for managing your plan and every year they send you a statement with information on the value of your fund and how much you can expect to receive in retirement at your current level of contributions.
When you retire between the ages of 55 and 75, you can take a lump sum and use the remaining funds to buy an annual pension to give you a regular income. Under new rules announced in 2014, if you are aged over 60, you haven’t touched your pension fund and your total pension savings are no more than £30,000, you can withdraw all of the fund. The first 25% of the money withdrawn is tax-free, and the rest is taxed as the top slice of your income for the tax year in which you make the withdrawal.
Stakeholder pensions are also defined contribution schemes. They work on a similar basis to ordinary personal pensions but they have to meet requirements set by the government. For example, management charges are capped at 1.5% of the fund’s value for the first ten years and 1% after that. Also, you are allowed to increase, decrease, stop and start payments and change providers whenever you want without being charged.
You can start paying into a stakeholder pension from just £20 per month, and pay weekly or monthly according to your preference. Because of their flexible nature, stakeholder pensions are popular with moderate earners and those with irregular incomes.
A self-invested personal pension (SIPP) is another type of defined contribution scheme, working in a similar way to standard personal pensions but allowing more flexibility in the way the money is invested. Whereas for other schemes the pension provider decides how and where to invest, the plan-holder of a SIPP can manage their own funds, choosing where to invest the money and switching the investments when they want to. They also have the option to pay an authorised investment manager to make the decisions for them.
Requiring more direct involvement from the plan-holder, SIPPs are usually more suitable for larger funds and people with experience in investing.
Whichever type of plan you decide is best for you, it’s in your interest to start contributing as soon as possible. The quicker you get started, the better chance you’ll have of building up a valuable pension fund for your retirement. However, it’s important you examine all your options thoroughly to make the right choice. If in any doubt, talk to your accountant or seek independent financial advice.