How Can I Set Up My Own Self-Employed Pension?
By 2018 there will be five million self-employed workers in the UK. They will outnumber public sector employees for the first time since records began, research by personal pension provider Hargreaves Lansdown predicts.
While the prospect of being one’s own boss may be appealing, there is one important respect in which self-employed workers could be disadvantaged compared to their employed counterparts.
Nearly half have no pension provision and almost a third intend to rely on the state pension for their retirement income. By contrast, somebody in employment with an average salary of £26,664 would receive employer contributions of £2,232 a year throughout their working life on average. Fast forward to retirement, and this disparity between employed and self-employed workers results in a savings gap of £91,512.
Self-employed workers tend to have irregular income patterns and perhaps prefer to invest any profit back in the business, with the idea it will eventually provide for their retirement.
However, another factor could be playing a part. There is a common misconception that only employed people can benefit from pensions, as they’re provided by the employer, much the same as salary. In reality, that’s not been the case for over 25 years. In 1988, the personal pension was launched in the UK and for the first time the plan was linked to the individual rather than their employer.
Why is this relevant to self-employed workers? It’s simple. The self-employed could really benefit from contributing to a pension, and the decision as to whether or not to do so should not be taken lightly.
The first obvious benefit is you could build a nest egg for retirement. The second benefit is you could use pension contributions as a tax planning tool to manage your higher or top rate tax liability.
When a UK resident under age 75 makes a pension contribution, the government automatically pays 20%. So, to have £10,000, you only need to pay £8,000.
In addition, higher and top-rate taxpayers can claim back more via their tax return, effectively reducing their tax bill.
Higher-rate taxpayers can claim back up to an extra 20%, so £10,000 in a pension could effectively cost as little as £6,000. Top-rate taxpayers can claim back up to an extra 25%, reducing the effective cost of the £10,000 contribution to as little as £5,500.
*There’s a good guide to self-invested personal pensions (SIPPs) at www.moneysupermarket.com in the Saving section.
Get your financial queries answered here by our panel of experts. They are happy to tackle any of your financial issues relating to the expat life. Just email us at questions@expatnetwork.com.
Detailed responses to highly personalised questions are not always possible.