If you used to be an employee, one of the perks you’re missing is a workplace pension. While this isn’t as exciting as free gym membership or fancy coffee, you could notice the difference in a few decades’ time. It’s mandatory for employers to enrol their staff in a scheme. There’s currently no such requirement if you’re self-employed. This doesn’t mean you can ignore your pension, though. You’re completely responsible for your own retirement savings, so it’s crucial you make a plan.
In this post, I’ll explain the steps you should take towards saving for a pension.
1. Check you’re making National Insurance contributions
To qualify for the full state pension, you need to have made 35 years’ National Insurance (NI) contributions. While you were an employee, this would’ve happened automatically. As a self-employed person, you must sort it out yourself.
If you’re a sole trader, you pay Class 2 and Class 4 NI contributions annually through self-assessment. Class 2 contributions of £3 per week are required if your turnover exceeds £6,365; once it hits £8,632, you pay Class 4 contributions – 9% of your profits up to £50,000, and 2% beyond that point. For more information, visit the Government’s National Insurance page.
Directors of limited companies who pay themselves a salary make contributions through payroll. The threshold for paying NI starts at £8,628. Accountants often advise company directors to pay themselves this amount as a salary and the rest in dividends. This means you won’t owe any NI or income tax, but the Government makes a contribution on your behalf. If you’re not paying yourself a salary of at least £6,136, you won’t build up qualifying years for the state pension.
You can check your state pension projection on the Government Gateway. This shows any gaps in your record and you get the opportunity to ‘buy back’ those years. It’s much cheaper to make contributions as you go along, though. Even if you qualify for the full state pension, it’s currently worth only £168.60 per week. You’ll almost certainly need some extra pension provision.
2. Locate any existing pension pots
It’s time to dig out those old pension statements. Most of us can count our employers in double digits, so you might have lots of tiny pots scattered around. They might look insignificant, but could add up to a substantial amount – especially if they’re left to grow for a few decades.
Can’t find your statements? Try the Government’s Pension Tracker. This is definitely worth doing. Fifteen minutes’ work could yield thousands of pounds.
3. Start investing!
Once you’ve totted up your existing pension pots, you can see whether it’s enough. If you’re not sure what income it’ll provide, read my guide on working out how much you need. There’s probably some way to go, so you need to start boosting your pension.
My earlier post on Building Your Assets explains the different types of pension available. As you’re self-employed, you no longer have an employer making contributions to your pension pot. This means you’ll have to stash away even more each month. The good news is that your pension contributions are tax efficient – when you pay into a pension pot, the Government refunds the tax. For higher- or additional-rate taxpayers, this is a significant perk.1
If you are the director of your own limited company, you can make employer contributions to yourself as an employee. Yes, that does sound odd. So, these contributions count as a business overhead and aren’t subject to corporation tax. This is usually more tax efficient than making personal contributions from your salary or dividends. Your accountant can advise you on the best setup for your circumstances.
Sorting out a pension probably feels like yet another item on your to-do list. It’s worth prioritising now, though, as you need time for your pension pot to grow. The later you start, the longer you’ll be working. Even if money is tight, consider investing £25 per month. You can increase the amount once your business is flourishing. And don’t forget to factor in this cost when deciding what to charge your clients.
- Make sure you’re on target to receive the full state pension
- Locate those old pension pots
- Start paying into your own scheme
Some moderate discomfort now means you can look forward to a comfortable retirement before you’re 95.
As a financial coach, I can guide you through the process of your pension healthcheck. By explaining the options available and using forecasting tools, I support you in making an informed decision that’s suitable for your situation. I never recommend a specific product or course of action. If you require advice rather than coaching, you should see a qualified financial advisor. They’ll either recommend products on which they receive commission, or you’ll pay a fee for independent advice. Please contact me if you’d like a free 30-minute chat about pensions or any other aspect of financial wellbeing.
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- 20% for basic rate taxpayers, 40% for higher-rate, and 45% for additional rate. [↩]