Self-Employed? Let’s Talk About Your Pension.
No point freaking out... Start growing your nest egg.
Yes, we all dream about freelancing: working from home, sometimes in your PJs or jeans and fave cashmere jumper... free access to the kitchen... no crowded tube... “fun” with the kids. Well you got it. Freelancing is getting more and more popular and this is especially true amongst women. According to the ONS, “self-employed people increased by 88,000 to 4.85 million (15.1% of all people in work)”.
But the reality is rarely as rosy as our dreams. The main negative of working freelance is pensions. Or lack of in this case.
What’s the difference from my friends who are employed?
When you are employed, you contribute monthly to a company retirement plan - with your employer doing the same. And on top of it you get an extra contribution from the Government called a tax relief (the cherry on the cake). Leave aside returns and performance; it is a very tax-efficient way to save money.
If you are not employed but self-employed, you can contribute monthly to a plan and you get the tax relief from the Government, but you don’t have an employer to participate in your plan. Since you are losing out on that, it is key to understand your tax-relief.
You will in both cases also receive a State pension but don’t only count on this. Note that for the current tax year (2017/18), you qualify for the full new State Pension of £159.55/ week if you have 35 years of National Insurance contributions.
If like us you think you can’t live on this - then keep reading and learn about personal pensions.
What type of personal pension for me?
Government scheme NEST (National Employment Savings Trust) is now also available to self-employed
Following these links to Money Advice Service will help you understand the different types of personal pensions better. Because we cannot say if one is better than another, it is really dependant on personal circumstances.
You can get tax relief on private pension contributions worth up to 100% of your annual earnings. This tax relief is automatic with your pension provider: when you contribute they will automatically credit your tax relief for you at a rate of 20% and adds it to your pension pot. If your pension scheme isn’t doing this automatically or if you are a higher taxpayer - you will need to fill in a Self Assessment tax return.
An Example please
- Basic taxpayer: your £80 contribution + £20 basic taxpayer relief = £100 in your pension plan.
- Higher taxpayer: your £60 contribution + £40 basic taxpayer relief = £100 in your pension plan.
You are free to save as much money as you like towards your pension each year. However, the tax relief is limited. Annually, you will get tax relief on £40,000 (for 2017/18) - this is called the “annual allowance”. If you haven’t used your allowance over the past 3 years, you can carry it forward too.