45% of freelancers and self-employed workers in the UK are not currently saving into a pension due to money struggles or other financial priorities. However, with the State Pension only providing a small income, your own pot could ensure you live comfortably after retirement.
We understand that planning for retirement may seem like a luxury for self-employed workers with an inconsistent income and no employer to top up their pension contributions. However, a range of pension options are available to suit different needs and requirements.
This article will explore four of the best pension options if you’re self-employed in the UK.
Stakeholder Pension
A stakeholder pension is a personal pension option where the money is invested in assets, such as stocks and shares, that will hopefully increase in value over time. This growth and your regular contributions will boost the size of your pension pot, which you can access from age 55 (rising to 57 in 2028).
This type of personal pension invests in a reasonably small range of funds, which are usually selected for you by the pension provider. It is less flexible than a self-invested personal pension (SIPP), which enables you to choose all the assets you invest in.
In addition, stakeholder pensions require much less administration than SIPPs, so you’ll only need to check on it occasionally.
A stakeholder pension has lower annual charges and a lower minimum monthly contribution – of as little as £20 – than a standard personal pension. Another bonus is that you can take a ‘contribution holiday’, which temporarily suspends your contributions. This is useful for self-employed workers who have a fluctuating income.
Self-Invested Personal Pension
A SIPP is also a type of personal pension. However, you can choose your own investments and make changes or additions to your investments as often as you want.
In addition, SIPPs offer a wider range of investment options, including company shares, collective investments, investment trusts, commercial property, land, and more.
It is up to you to choose and manage these investments, so this type of pension is usually more suitable for people who are comfortable making their own investment decisions. If you are not experienced in this, hiring a regulated financial adviser or choosing another pension option is suggested.
Nest Pension
The National Employment Savings Trust (Nest) is a well-known pension scheme set up by the government and run as a trust by the Nest Corporation. Although it is a government-backed scheme, the money comes only from your contributions, not from taxpayers.
As a self-employed person, you must set up your contributions by either Direct Debit or a debit card. You can contribute as often or as rarely as you like, as long as you pay at least £10 each time. Nest will also claim basic rate tax relief on any contributions and add this to your pension pot.
There are no restrictions on how much you can save in your Nest Pension pot. However, you may be charged additional tax if your contributions exceed the annual allowance.
Lifetime ISA
So, a Lifetime ISA is not quite a pension plan, but they are designed to help you save for retirement. You must be between 18 and 40 years of age to open a Lifetime ISA, but you can keep paying into it until you’re 50.
You can pay in a maximum of £4,000 a year, and for every £4 you pay in, the government adds £1 at the end of the tax year – giving you a maximum top-up of £1000 per year.
The upside is that the money is already yours, so you won’t be taxed when you draw it out. However, you may be charged a 25% withdrawal charge if you make an unauthorised withdrawal. This includes trying to withdraw it before you are 60.
Ready To Start Saving For Your Retirement?
Working for yourself is about building a future. If you want to live comfortably after retirement, it’s crucial to save a minimum amount each month and put it in your pension.
If your income is higher some months, consider putting more than your minimum into your pot or take advantage of the ‘carry forward’ rule. This lets you combine any unused annual allowance (£60,000 in every tax year) from the previous three tax years.
Finally, ensure to review your pension pot every six months to see what you’ve saved so far and whether increasing your contributions is possible.