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Working for yourself brings with it lots of challenges, and it is unsurprising that many self employed people end up sticking their pension planning right at the bottom of the ‘to do’ list. It equates to just another job and sometimes investing your hard earned wage in a pot that you can’t access for years might not seem a priority. Quite the contrary, however, if you are self-employed, pension planning is paramount for your future and can make the difference between a comfortable retirement and one not so secure. Savings for retirement doesn’t just go into a simple pot of money. In fact, the more you invest, the more tax relief you get from the government. Even with small amounts deposited into your pot as someone who is self-employed, pension pots can end up growing substantially by the time you retire. By choosing a modern and transparent personal pension plan you get to control how much you put into the fund every month and where it is invested. Advantages of Modern Personal Pension Plans Different companies offer different regulations with regards to their Personal Pension Plans but on the whole every plan emphasises flexibility. Many schemes are branded as SIPPS (self invested personal pension plans) and the main difference between a personal pension plan and a SIPP is the ability to invest in individual commercial property in the latter. If you have no intention of purchasing a commercial property, then a SIPP may not be the right vehicle for you (the charges are higher in order to offer this option). You can put in a little every month, or as much as £40,000 a year, should you wish (or even more than this if you have unused annual allowance from the previous 3 tax years). The contribution amount can be tweaked too according to your requirements or changes in your circumstances. Another advantage is that you will have a reasonable amount of input on where your money is invested and most companies will offer a good range of collective investments. For higher net worth pension pots and/or planned contributions it’s beneficial to look for a provider with an extensive range of fund choice. For anyone with several, often older pension plans, you can consider transferring to a more modern and transparent personal pension or SIPP which, if suitable, is relatively straightforward with the help of an adviser. If this is the right thing to do, you can consolidate the money and make everything much easier to manage. Tax Benefits for the Self-Employed Pensions afforded to employees in the form of work-based schemes are not available to you if you have your own business, but the good news is that you do qualify for many tax perks. Some of these are very generous too: Tax Relief and Tax Efficiencies - Paying into your pot means that you receive a basic-rate tax relief form the government, which translates to a 20% boost in funds. The government adds £20 for every £80 you invest. For higher or additional contributors, you can claim even more relief when you complete your annual assessment return. Just like an ISA for the self-employed, pension growth available to you is protected from tax. There is no income or capital gains to pay on investments and this is true no matter how much they accumulate. Pension Drawdown - You can also access your cash before you retire as long as you are at least 55 years old. You can access 25% tax free and you don’t need to access the remainder until a later date if that suits your circumstances. Any income drawn over the amount of tax free cash is taxed as income, but the good news is you can carefully plan when and how to take this income in order to maximise tax efficiencies and complement any income that may still be coming in from self employment. Pay Profits into Your Pot - For owners of limited companies there are other advantages of paying your profits straight into your pension plan as company contributions. Paying company contributions directly into a pension renders them not eligible for corporation tax and, as you are not taking the profits as income, you avoid paying large amounts of income tax too. For anyone who is self-employed, pensions might seem complex at first, but get yourself a good advisor and you will most definitely reap the benefits, both immediately and in your retirement. Author Plate Claire Novakovic is the go-to expert for those who need self employed pension advice and help with other related issues. As a Chartered Financial Advisor, she is the inhouse pension expert for Accudo Investments. Offering comprehensive independent financial advice tailored to each individual’s needs, Accudo Investments provides effective portfolio management and tax strategies to meet the needs identified.
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