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Claire Dentith joins the Mortgage & Protection Podcast once again, to share her expertise on Self-Employed Pensions.
Why is it important for self-employed people to set up a pension?
People often have a negative view of pensions, and certainly many self-employed people aren’t saving for their retirement. The full state pension is currently £179.60 per week, which is the equivalent of £9,339 per annum. To be fully entitled to that you need to have 35 qualifying years of work.
People born after 1978 now won’t get their state pension until they’re at least 68. Those born after 1954 are seeing their state pension age moved from 65 to 66 and those born from 1961 to 1977 currently have a pension age of 67.
Having your own pension provision means you have more control over when you may be able to retire, and have more income coming in once you stop working.
What is the most suitable pension for the self-employed?
A personal pension is usually the most suitable pension for a self-employed person, but as with most financial products, it depends on your individual circumstances.
I often get asked whether a SIPP is suitable for a self-employed person. This is a Self-Invested Personal Pension, which allows you to invest in things like property as part of your business. It’s certainly an option to consider.
How does a SIPP work?
All a SIPP does differently from a personal pension arrangement is it allows people to invest in non-traditional pension funds. In a normal personal pension, you invest in standard pension funds. In a SIPP arrangement, you can effectively invest in things such as commercial property or other non-traditional investments.
You manage the investments yourself, so you need to have a good idea what you’re doing. You could also end up making non-regulated investments, which is an area to be quite cautious of. But if you’re interested in investing in commercial property, it can be really useful for the self employed.
What is the process for setting up a self-employed pension?
There are no differences for self-employed people in how you set up a pension. Just as for an employed person, we start by looking at their circumstances, how much they feel they could afford to invest and what level of risk they want to take. That helps us make the appropriate recommendation. Then the setup process is identical too.
Are there any differences in pensions if you are a sole trader, a partner or a limited company director?
The main difference is the way that you would make contributions. If you are a sole trader or a contractor, you would make contributions to a pension personally and tax relief is added on top.
For example, if you are paying in £80 a month, that would be grossed up to £100 being paid into your pension.
Meanwhile if you’re running a limited company, you could choose whether to invest personally or make employer contributions from your business. The employer contribution would then attract corporation tax relief. So, rather than your £80 being grossed up to £100, the sum you’re putting in per month would reduce your corporation tax bill.
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How does tax relief work on a pension?
If you’re putting contributions in on a personal basis, tax relief is automatically added to that contribution. You then don’t have to include that in any tax returns or anything like that. It’s done automatically by your pension provider.
If you are a limited company and you’re making employer contributions, you would need to document that in your accounts to offset it correctly against your business profits and claim the corporation tax relief.
Most limited companies will have an accountant who will do all the necessary paperwork for you.
Do self-employed people get tax relief on pension contributions?
Again this is identical whether you’re employed or self employed. If you personally put into a pension, you will automatically get 20% added on that contribution, which is the basic rate of tax.
If you are a higher rate taxpayer, when you file your tax return you can claim some of the higher rate relief too. That will come down to a conversation with your accountant.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Can I reduce my tax bill by paying into a pension?
As a sole trader you wouldn’t be able to reduce your income tax liabilities because you automatically get tax relief added to your contributions. As a limited company, you can reduce your corporation tax bill, as your contributions as an employer are a business expense. So in theory, yes, but you won’t specifically reduce the amount you have to pay to the tax man.
Is a private pension tax deductible for the self-employed?
It depends whether that self-employed person is a sole trader or a limited company. For a sole trader, it’s not tax deductible. They just get the tax relief added on to their contribution.
For a limited company director making employer contributions this is a tax deductible business expense that reduces your corporation tax liabilities.
If there’s any doubt, speak to a financial advisor. When I’m talking to self-employed people about their contributions, I always get their accountant involved just to make sure that there’s nothing going on behind the scenes that we need to be aware of.
How much should the self-employed save for a pension?
It all comes down to your individual circumstances. When I’m speaking to self-employed clients, I will look at the automatic enrollment scheme that was introduced by the government back in 2012. The minimum contribution that goes into that is 8% of a person’s salary.
There’s still a view that even that might not be enough, but I think it is a reasonable starting point. Quite simply, the more that you can afford to throw in now, the more you can have when you retire.
How much state pension will I get if I’m self-employed?
The government changed the rules a few years ago. There is now what’s known as the flat rate state pension, which is £179.60 in the current tax year. Whether you are self-employed or employed. as long as you have done your qualifying years, you would get that full amount.
If you’re not sure whether you have enough qualifying years, or if you will have by the time you plan to stop working, you can get a state pension forecast on the government website.
What are the benefits of setting up a pension if I’m self-employed?
There are two elements to that. First is the fact that your contributions are added to if you’re a sole trader or contractor – or you make potential savings on your Corporation tax bill, if you are a limited company.
And second, you are building a pot of money for when you retire. When I speak to people, one of the biggest reservations is ‘well, what if I don’t get to retire? What if I die before that happens?’
We can’t know the answer to that, though, so the best thing we can do is plan to live. And if you die before using all of your money within a personal pension arrangement, anything you don’t spend can be passed down to your family.
Why is it important to talk to an adviser like CD Financial?
As advisors, we’re here to help people plan. We see ourselves as life planners more than financial advisors. People’s plans can change, which is why we work with our clients on an ongoing basis. And one of the challenges is trying to get people to visualise what their retirement looks like and how much they need to live on.
It’s important to have a goal in mind, because life is busy. We don’t think about what we’re going to do in 20, 30, 40 years. But if we don’t take time to think about that and leave it to the last minute, it could lead to disaster. The sooner you start looking at that, the better.
We’re here to help and make it easy for you, so get in touch and start planning today.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
YOUR HOME/PROPERTY MAYBE REPOSSESSED IF YOU DO NOT KEEP UP WITH REPAYMENTS ON YOUR MORTGAGE
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