Are you self-employed? Worried about how you’ll pay the bills when you retire? Know you should begin thinking about pensions but not sure where to start?
Relax! Setting up a pension when you’re self-employed is much easier than you think and it will give you peace of mind later on in life. Here’s everything you need to know, from what a pension is to how you go about finding the best one for you.
And if you’re in two minds whether to start a pension or not, do it, right now! The sooner you start, the richer and more secure you’ll be in retirement. Starting a pension is often the best decision you’ll ever make.
First up, what actually is a pension?
A pension is a pot of money put away for when you retire, to provide you with an income that hopefully matches the lifestyle you’ve become accustomed to, so you can continue to live your life in the same way, just without the work, hurrah! Or, you could spend it all on gardening – you’ll be into gardening when you retire, everyone over 60 seems to be 🌻.
Ideally, you’d typically add money to your pension throughout your working life, this money goes into something called a pension fund. Your money and thousands of other people's money will be invested across many large, stable and safe companies in the UK and across the world. It can also be invested in things like bonds, which are large loans that pay interest.
The pension fund would aim to make more money from the money invested, and as a result your pension will get bigger over time, giving you a nice big figure to live on when you retire. Kerching!
Pensions are normally very safe investments, and where your money is invested within your pension plan is typically adjusted based on your age. It’s far better than keeping cash under your bed. You can trust us on that.
Familiar with a workplace pension?
The good news for employees of a company is that it’s all handled by the company itself in partnership with a pension provider (the people who look after your pension), all through your monthly pay, called PAYE (Pay As You Earn), and you’ll see your payments on your payslip. This type of pension is called a workplace pension.
You’d also be automatically enrolled into it, and the business also has to contribute a minimum of 3% too.
It all works very well and it’s great for employees. But what about if you’re self-employed?
Pensions when you’re self-employed
Being self-employed comes with all sorts of perks – set your own hours, approve your own holidays, have a longer lunch, and best of all decide what radio station to listen to. But it does mean a bit more planning for your retirement, as you’ll have to sort your pension out all by yourself.
Instead of a typical workplace pension, where your employer handles everything for you. A self-employed pension is managed by you, you decide how much you’d like to pay, and have to set up the payments yourself. However, it’s easy to do! We’ve run through it all below.
Plus, the Government will top up your pension payments by 25% to make them effectively tax free like a workplace pension. We’ll dive into that more below too.
And if we’re getting technical, a self-employed pension is technically called a personal pension or a private pension, rather than a self-employed pension – as you don’t have to be only self-employed to get one, employed people can too if they like.
Tax relief on self-employed pensions
The Government wants you to save as much as possible into your pension – it helps the economy, makes you wealthier and allows for less reliance on the state pension in future. So they let everyone contribute to their pension tax free (in boring finance terms, pensions are tax-deductible).
Don’t worry, it may all feel a bit complicated or confusing, but a good pension provider will actually handle everything all for you automatically, including the tax. A self-employed pension really is as easy as a workplace pension (almost!).
And if you’d like to learn more, here’s how the tax relief actually works if you are self-employed…
As you’ll know, your pay is different to employed people – you don’t have an employer to handle everything, you have to pay tax yourself, and if you want a pension, you have to contribute to your pension yourself too.
This means you can’t make payments to your pension before you pay tax like employees. You have to pay tax on everything you earn, so you’ve already paid tax on the money you’ll put into your personal pension.
So to give you back the tax you’ve paid on your income, and to make your pension contributions tax free, the Government will top up the payments you make to your pension with cash – yes really!
If you’re a basic rate taxpayer (which means you earn up to £50,270 in 2021/22 and pay 20% tax), the government will give you the 20% back in cash, directly into your pension – which works out as a 25% bonus on what you put in. That’s £25 for every £100 you pay in. So, you’d end up with £125 in there, just by putting in £100!
And if you pay the 40% higher rate tax (which you will do if you earn between £50,271 and £150,000 in 2021/22), you can claim that 40% back too. However it’s not automatic, but is easy, all you need to do is claim this back from HMRC via your self-assessment tax return.
But do watch out, as there are limits on how much you can put into your pension per year and still claim tax relief. The limits are either 100% of your earnings (your annual salary) or £40,000, whichever is the lowest.
And for those of you planning ahead, there’s a limit of £1,073,100 in total, before you have to start paying tax on your contributions. A nice problem to have!
What if I used to be employed before becoming self-employed?
When you choose a new pension plan, you can move any old pensions from old jobs over to the new one you’ll set up for your self-employed pension, so you can keep all your money in one place, track it properly, and invest it all in the same fund, potentially benefiting from cheaper fees too.
There’s no need to panic about lost pensions of money squirrelled away and forgotten. A good pension provider can hunt down your old pension plans for you. You’ll just need to tell them the name of your old pension providers and then after that, you won’t have to do a thing!
How to get a pension when you’re self-employed
The good bit is, it’s really easy to set up a self-employed pension. Technology has really changed the industry and it’s all done via a website or an app on your phone. Although you can still speak to someone if you’d like.
All you need to do is find a pension provider that’s best for you, and they’ll pretty much handle everything. Modern pension providers come in the form of apps and websites, which have up-to-date information to show you how much your pension is worth at any time, and tools to show you how much you should be investing to meet your retirement goals.
Best of all, you now get to decide where your money is actually going. So if you only want to invest in companies doing good in the world (like we do), and avoid the evil oil and tobacco industries, you can!
So, to get a pension, all you need to do is find the best provider for you. And luckily for you, we’ve done the hard work and reviewed them already. The best providers are all below.