A pensions guide for the self-employed
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Being self-employed brings many wonderful benefits. Perhaps you have more earning potential than if you were employed, or maybe you have greater control over your working hours. However, self-employed people are arguably at a disadvantage regarding pensions.
Employed people are automatically enrolled on a workplace scheme when they take their new job, with their employer contributing at least 3% of the employee’s salary. A self-employed person, however, must take responsibility for setting up and managing their own pension.
In this guide, our Grantham financial advisers explain some of the key pension options for self-employed people in 2024. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:
01476 855 585
info@casfin.co.uk
Get your State Pension right
Both the employed and the self-employed in the UK are entitled to a State Pension when they reach their State Pension age. This assumes that an individual has at least 10 years of National Insurance (NI) contributions on their record. Otherwise, they will not receive anything.
To get the full new State Pension (£221.20 per week in 2024-25), an individual needs 35 “qualifying years” of NI contributions on their record. When they eventually claim their state pension income, this will rise each tax year by at least 2.5% under the “triple lock” system (to help preserve its spending power amidst rising inflation).
Given this benefit (the triple lock) and the indefinite duration of the income, investing in the best State Pension is almost always a wise idea for a self-employed person. For you, this begins by checking your NI record to identify any “gaps” and discover how many more qualifying years you need to gain the full new State Pension. You can check your record for free on the UK government’s website.
In addition, self-employed people also need to ensure they are fulfilling their NI payment obligations. While an employee has this done for them through payroll, a self-employed individual must be responsible for their own NI and provide full disclosure on their tax returns using Self-Assessment each year.
Setting up your own pension
Whilst the State Pension is important to a wider retirement plan, it is unlikely to provide a sufficient income on its own to support your future lifestyle. To address this, self-employed people should consider also setting up their own personal (or “private”) pension.
In 2024, a qualifying newly-employed person in the UK will be enrolled onto a workplace scheme which they automatically contribute to via their paycheque. A self-employed individual does not enjoy this benefit. Indeed, with their focus on setting up their business and establishing profitability, self-employed people often forget about pensions until years later. At which point, considerable growth potential from compound interest will have been lost.
To avoid this, consider getting financial advice about your pension options as early as possible when beginning your business. Even a “small” monthly contribution (e.g. £50-£100 per month) could make a huge difference to your future retirement fund, taking pressure off your contributions when you are older. However, it is not too late to start planning for retirement if you are self-employed and have delayed thinking about pensions until now.
A good starting point is to establish your existing retirement savings. Do you have any old pensions (e.g. from previous employers before starting your business)? Tracking these down will help you discern how much you already have in retirement savings and how much more you might need to save to reach your “target fund”. The UK’s pension tracing tool can help with this process, and a financial adviser can also assist you.
Optimising and managing your pension
Which pension provider should you choose as a self-employed person? How much should you contribute each month, and which investments should you focus your portfolio on? At this stage, seeking financial advice will often be helpful. There are many options on the market and taking a “DIY approach” to investing can often lead to costly mistakes.
Every self-employed person is different. Financial goals, starting points, investment horizons and risk tolerances can all vary – requiring unique investment planning and strategies. One benefit of having a personal pension, however, is that you may face lower fees and wider investment choices compared to an employed person with a workplace pension. Whilst this might be intimidating for some, it is possible to take advantage of these benefits with the help of a professional who understands your needs and goals – as well as the wider tax, pension and financial landscape with you need to navigate.
Once your pension strategy is in place, it is important to stay true to your long-term plan and make periodic adjustments (e.g. “portfolio rebalancing”) so your chosen asset allocation remains consistent over time. Again, a financial adviser can guide you about how often you should attend to your pension and how to make adjustments prudently and responsibility.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
