Retirement planning for the self-employed

Self-employed man

Pensions

MoneyPlus Features Team

30th December 2013 at 11:04am

The butcher, the baker and the candlestick maker. Three occupations from the well-known nursery rhyme. Back then, all three would most likely be self-employed. But with the changing face of the high street, that probably isn’t the case today. They are more likely to be an employee of a large supermarket chain (although, I can’t ever remember seeing a candlestick maker on my high street or supermarket for that matter).

Today’s 4.2 million self-employed individuals in the UK are more likely to be based at home than on the high street. And they are more likely to be making dough as an IT software developer than in a bakery.  Or there’s a better chance they are carving out a living in the construction trade than in a butchers shop.

Being your own boss has some obvious attractions. Having more control over your working hours and which jobs and tasks you take on has a certain appeal. But it can mean missing out on those fringe benefits which an employer provides. There is no sick pay or holiday pay, and no employer contributions going into a pension for when you stop working.

Are the self-employed missing out on workplace pension reforms?

Pensions in the workplace are currently undergoing a transformation. Employees are being automatically enrolled into their employer’s pension scheme. And ultimately all eligible employees will see contributions of at least 8% of salary paid into their pension with at least 3% coming from their employer.

But if you’re self-employed you will not see any of the benefits from auto-enrolment. You will be solely responsible for your own pension provision. There will be no employer contributions to help boost your retirement fund.

However, your own pension contributions do receive a boost in the form of tax relief. For every £100 you pay into your pension, HM Revenue and Customs will add another £25.

If you are a higher or additional rate tax payer, there is additional tax relief to be claimed through your self-assessment return. This has the effect of reducing the amount of tax on your income that is subject to tax at the higher rates.

And that’s not the end of it. Paying a pension contribution can help maintain certain benefits and allowances, such as child benefit and the personal allowance. There will be more on this in my next blog.

Over reliance on the state? 

Over 53% of men and 67% of women who are self-employed have no pension savings at all. This means they may be relying on the basic state pension as their only source of retirement income.  Or perhaps they are hoping for a windfall if they later sell their business. Alternatively, they may keep working in their business, perhaps with reduced hours.

Even with a full National Insurance contribution record, the flat rate state pension looks likely to be £144 per week when it’s introduced in 2016. This equates to approximately two-thirds of the full-time equivalent of the national minimum wage. This could be a considerable drop in your standard of living in retirement.

Never too late

It’s never too late to start paying into your pension. However, the longer you leave it the harder it becomes to catch up on missed contributions. If you haven’t contributed in recent years, now may be a good time to speak to an expert about the carry-forward rules. This may allow you to go back and pay up to three years’ worth of contributions in one go – assuming you have sufficient profits to do so.  Today’s plumber, child-minder and website developer can all take control of their retirement planning – if you’re your own boss, it’s up to you!

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