Caroline Duong Head of Business Admin at ANNA Money explains how self-employed people can build their pension savings. Why its trickier for self-employed people to build a pension
“As a self-employed individual, setting up a pension is essential to protect your financial future. However, saving into a self-employed pension plan can be a lot more challenging without an employer handling contribution for you, or when your income fluctuates each month.
The longer you leave it, the harder it becomes to catch up, so even saving a small amount regularly and allowing more time for it to grow is better than waiting until you can afford a big contribution.”
What to do if you haven’t got one
“Pensions are not one-size-fits-all, and the best option for you will depend on your individual circumstances and retirement goals. Whether it’s an ordinary personal pension, stakeholder pensions, SIPP, NEST, or LISA, you should prioritise speaking to an independent pension adviser and sitting down to research the pros and cons of each option.
First, check whether you already have money hiding in an old workplace pension. Even a pot from a Saturday job or a company you only worked for briefly can reap rewards and you may be pleasantly surprised to see how old pots have grown. Although this process can sound daunting, it can be made a lot simpler with the Government’s Pension Tracing Service, which locates mislaid plans.
If you do find an old pot, check its fees and performance before moving it. Combining pensions can make them easier to manage, but before passing it onto your provider for them to handle, make sure you won’t lose any valuable guarantees or get stung by exit charges.”
How to build up savings
“To build up savings, consistency is key. Once an invoice lands, move a small percentage of the money left after essential costs and tax into your pension, or put it aside in a separate pot in your account so you can pay it into your pension next time you sit down to do your admin. You should make sure minimum contribution targets are set at a level that leaves you with enough for day-to-day spending. If you have a bumper month, top it up, if business is quieter, pay in less. Little and often is better than waiting for the perfect time.
Check your pension every so often to see how your savings are building. This can also help keep you motivated to keep saving or intervene if you don’t feel your nest egg is achieving what it should. However, if retirement is a long way off, you should try to avoid the trap of tinkering too much. Even if it can be disheartening to see a pension underperforming over a short period, you must always remember that markets fluctuate and you have a long-time horizon to ride out the peaks and troughs.
ANNA Money can take some of the guesswork out of this by bringing your business account, invoices, spending, paperwork and estimated tax bill together in one app. Its automated bookkeeping sorts transactions and captures receipts throughout the year, while its smart money pots can automatically skim off a fixed amount or percentage whenever you get paid, keeping it separate until you’re ready to move it into your pension.”
Any tax allowances and ways to maximise savings
“One of the most valuable tax allowances available to self-employed savers is pension tax relief, which allows you to boost your retirement pot without footing the full bill yourself. For every £80 a basic-rate taxpayer contributes, the government adds £20, while higher and additional-rate taxpayers can claim further relief through self-assessment.
It is also worth noting that the standard annual pension allowance is currently £60,000, giving many self-employed people considerable scope to put money aside tax-efficiently – giving your retirement pot a bigger boost.
If you’ve missed out in the past, don’t panic, you can usually claim back tax relief from the previous four tax years, and making the most of your annual pension allowance could give your savings an even bigger boost.
Even if you take time off, it’s worth remembering that even non-earners can contribute up to £2,880 each year, which the government will top up to £3,600 via tax relief. This can be a great option if you have access to savings that you’re comfortable putting away for retirement.”
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