Retirement can be a time to look forward to, offering freedom, rest and more time to do the things you love. However, planning for retirement can bring anxiety, particularly when thinking about income. This is where pensions come in as they offer reassurance that you will be able to live comfortably in your later years. Thanks to workplace pensions and auto-enrolment, pension planning can be relatively simple for employees but for those who are self-employed, it can be a bit trickier. In fact, research shows that only 31% of the 4.5 million people who are self-employed in the UK, are saving into a pension.
With this in mind, how do those who are self employed approach pensions and ensure that they have security in their retirement.
State Pension
The state pension is awarded to those who have made long-term contributions to National Insurance. Currently the state pension age is 66 and those who are eligible for the full pension will receive £185.15 per week. When you’re an employee, national insurance contributions are taken automatically from your wages.
Those who are self-employed are also eligible for state pension but only when enough NI contributions have been made. This means 10 qualifying years on your NI record in order to receive the state pension and 35 qualifying years in order to receive the full state pension. It’s for this reason why it’s important for those who are self-employed to make regular NI contributions, even if you don’t have to.
Private Pension
The state pension offers a much-needed lifeline, to both employed and self-employed workers- however many also opt for a private pension. When it comes to those who are self-employed, they may have to rely on a private pension, for example if they haven’t made enough NI contributions in order to receive state pension. In fact, many people use private pensions as a way to boost their retirement income in general, providing more security and improving their standard of living.
When it comes to private pensions, there are different types to choose from. Fortunately, there are a variety of trustworthy pension providers out there, who will look after your money. The most basic type of pension is a personal pension, which works similarly to a savings account. However, there are potential savings in tax, which many self-employed individuals tend to miss out on.
Another factor to consider is investment. The idea being that the money within your pension could be invested, leading to a higher pay-out. There is always an inherent risk involved when investing and this should be weighed against the potential for growth.
When it comes to pension investment, there are two main options to choose from. Self-invested personal pensions or SIPPS offer much more control, allowing you to pick and choose which investments you’d like to make. The downside to SIPPS is that they often come with higher charges.
Stakeholder schemes offer an alternative to SIPPS, in which investments are chosen for you and charges are low. Therefore this is the best option for those who just want to see their pension pot grow, without having to get hands on.
Choosing which type of investment is right for you will depend on a number of factors, including how much risk you’re willing to take, your expertise within investment and of course, how much you want to pay in charges.
Self-employment comes with so much more freedom but this is offset with a greater degree of responsibility. Ensuring that you have a viable pension in retirement, is one such responsibility. However, it’s never too late to invest in your future and with so many pensions plans available, you can ensure that your retirement will be secure.
The experts at Salhan Accountants offer comprehensive financial advice and services, including pension planning. Don’t hesitate to visit their website for more information or you can give them a call directly.
