Becoming self-employed has a number of solid advantages. You can be your own boss, set your own schedule, and you tend to get paid more for the same amount of work than you would in regular employment. However, there are also disadvantages and one of the biggest issues is the lack of an occupational pension scheme. As it is important to ensure you have adequate savings for retirement as well as income for the present, this is an important issue to overcome, and this is best done by simply taking out an alternative.
Choosing Your Pension Scheme
The state pension alone is unlikely to meet your needs for retirement. As somebody who is self-employed, you will not have an occupational pension to top up your retirement income so you will probably want to take out a personal pension. These are available from a range of banks, building societies and specialist providers. It is a good idea to start as soon as possible, as compound growth will prove very rewarding. For this reason, saving £100 a month for twenty years is significantly better than saving £200 a month for ten years, even though the amount you pay will be the same.
It is a good idea to shop around and find the pension that best suits you. Many self-employed people prefer stakeholder pensions, a particular kind of personal pension. These are more flexible than many alternatives and have to contribute to certain standards
What makes stakeholder pensions so popular with the self-employed? Chiefly, this is down to flexibility. For a start, they offer low minimum contributions with a minimum of just £20 a month. As it is best to start contributing to a pension as soon as possible, this is ideal for those in the early stages of self-employment who may still be building up their income or have variable earnings from month to month. There is also no penalty for stopping and starting your contributions or changing the amount, which once again is ideal for those who are in the early stages of self-employment and not as stable as they expect to be further down the line.
Other advantages of stakeholder pensions include low fees – no more than 1.5% of the fund’s value in the first 10 years and 1% thereafter – and the fact you can move to a different provider without facing penalties.
Personal pensions do still offer some disadvantages over some disadvantages over an occupational pension, mainly the fact that there will be no employer contributions. However, you will benefit from tax relief boosting your fund. Basic rate taxpayers will get an extra 20% of all they contribute added by HMRC as tax relief, meaning that every £100 you put in adds £120 to your pension pot.
You will be entitled to relief on £3,600 or contributions equal to 100% of your earnings, whichever figure is the greater. A maximum annual allowance of £50,000 also applies. Above this limit, contributions will be subject to tax.