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Investment and retirement considerations for the self employed

November 2017


Tags: Retirement

You might enjoy the benefit of being in charge of your own work, but you can end up paying for this freedom in other ways.

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All companies that employee people now have a responsibility to provide pensions to its employees but it’s just one of the many things a self-employed person will have to provide for themselves.

So if you are self-employed, you risk being left behind in the key areas of retirement saving and other long-term benefits - unless you take a few simple steps.

 

Set up a pension

It is still possible to set up a pension as a self-employed worker. Yet an alarming two thirds of self-employed people do not pay into a pension, missing out on key tax advantages.

As a general rule, to work out how much you should be paying into a pension every year, divide your age when you start the pension by two and save this percentage of your gross income into it every year. So 36-year olds should be saving about 18 per cent; 40 year-olds, 20 per cent, and so on.

A flexible way to plan for your retirement is using a Self-Invested Personal Pension (SIPP) where you can make regular contributions, change the amount, suspend them and make additional lump sums in the good years to make up any years when business has not been so good. If you are employed by the company you own, then the company can also make a pension contribution on your behalf and this is treated as a trading expense to reduce the company’s tax liability.

Self-employed workers can personally invest (from a private bank account), up to 100 per cent of salary into a pension (there’s an annual maximum of £40,000) and receive income tax relief at 20 per cent for basic rate taxpayers and 40 per cent for higher rate taxpayers.

You can transfer former workplace pensions from previous employers into your SIPP and manage them all in one place.

Click the button below to learn more about SIPPS and how to invest in them

What type of pension suits self-employed people?


Most pension providers allow you to stop, start and change the level of contribution whenever you want.

Self-employed people have the same pension options available to them as employed people. These are: private, stakeholder, NEST (the national pension scheme set up for auto-enrolment) and SIPPs.

SIPPs can be popular with the self-employed, who are used to managing their finances on their own, because they allow savers to choose what they want to invest their pension savings in, rather than deferring the decisions to a pension fund manager.

You may be worried about fixing your monthly pension contributions when your income is irregular. You needn’t, because most pension providers allow you to stop, start and change the level of contribution whenever you want.

Alternatively, you can set a low minimum monthly contribution and then top up on an ad hoc basis whenever you are able to make a larger contribution.

 

Other considerations

Besides your long term retirement saving, there are other needs to take into account to protect your savings now and in the future.

As well as setting aside a portion of income for retirement, it’s important to have a short-term savings buffer if you are self-employed, to help you ride out any immediate cashflow issues or pay for any other emergency, business-related outgoings, such as equipment.

Three months’ worth of income is often quoted as a useful cash buffer for anyone who is self-employed. This can help to cover fallow periods, when you are not earning income but may be investing in research or training instead.

  • Life and income protection insurance

Life insurance is not costly but it is vital if you are self-employed, to make sure your family have costs covered if anything happens to you.

Income protection is designed to pay a monthly amount out to you if you are unable to work due to ill health and is also useful for self-employed people to set up – employed people often receive this as a benefit.

  • Private health care

The benefit of private health care is often provided by employers. If it is important to you, there are a range of plans that you can set up as an individual.

 

Learn more about SIPPS and how to invest in them

Learn more

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Rebecca is an award-winning finance journalist and the Co- founder and Director of Good With Money

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Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.

In fact, even 61% of confident retired investors say they want more retirement income*.

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*Source: LIBF & 7IM, 2018.