More and more people – particularly in Wales – are self-employed, but according to recent figures* only eight percent of self-employed workers aged 25 to 34 are saving into a private pension.
This is compared with 59 percent of employees in the same age group who are contributing to their pension pot.
This is a worrying state of affairs, since UK-wide figures show self-employment has grown by 46 percent since 2000 and if this upward trend continues the self-employed could outnumber public sector workers by 2020.
While many enjoy the freedom, the chance to be your own boss, the flexing of those entrepreneurial muscles, and the particular sense of achievement that working for yourself brings, there are some knotty financial planning issues we see time and time again from those who work for themselves.
One of the most common is the failure to save enough for retirement.
Of course, if you work for yourself you are entitled to the same State Pension as every other worker.
Since April 2016 there has been a new flat rate pension based entirely on a worker’s National Insurance record.
For the current tax year (2016/2017) the new State Pension is £155.65 per week – however if you worked for someone else before becoming self-employed you might have built up extra entitlement under the old system, so you may get more.
Many of us will want another source of income once we retire, so it is important to make provision as soon as we can – even if retirement seems a long way off.
As a self-employed person this takes discipline. After all, you don’t have an employer to match your pension contributions and your income might be less regular than some, so setting money aside each month might be harder.
But there is support out there. For instance, you will be entitled to tax relief on your pension contributions, usually up to a maximum of £40,000 a year, provided your taxable earnings in the tax year are at least this.
So, if you’re a basic-rate taxpayer, for every £100 you pay into your pension, the government will add £25. If you are a higher rate taxpayer you can claim back a further £25 for every £100 you pay in through your tax return.
This annual allowance for 2016-2017 is £40,000. If you go over £40,000, you won’t get tax relief on further pension savings, but you may be able to carry forward any unused annual allowance from the past three years.
Most self-employed people use a personal pension for their pension savings. This way, you can decide where you want your contributions to be invested and the pension provider will then claim tax relief on your behalf and add it to your pension savings. How much you get back depends on how much is paid in, how well your savings perform, and the level of charges you pay.
There are various type of personal pensions so it is important to assess which one is the neatest fit with your circumstances – I would strongly advise that you seek professional financial advice before you commit.
For professional financial advice, tailored to suit you, call the Morgan Hemp team on: 01792 466428.
*From the RSA Entrepreneurial Audit 2017.