How can the self-employed make pension contributions?
Fluctuating earnings can make self-employed pension contributions difficult, but there are a range of options even when you’re not sure how much you’re going to earn each month. You’ll be able to better secure your future, and build a pension pot in a sustainable way.
Your accountant can help you decide on the best self-employed pension scheme for you, using their knowledge of your business and earnings levels. So what do you need to consider when making self-employed pension contributions?
Is the pension flexible?
A flexible pension, where you can adjust your contributions as your income changes, is paramount when you’re self-employed. With so many other demands on what is typically a fluctuating income, you need to be confident that you can meet your priority payments, such as mortgage or rent.
Some providers offer self-employed pensions that can be started and stopped where necessary, or allow you to make small pension contributions but top them up when you’re able. You may also be able to make a single large capital payment into a pension scheme.
Tax efficiency
As a self-employed individual, you benefit from tax relief on your contributions in the same way as employed people. If you’re a basic rate taxpayer, for instance, every £100 you contribute is topped up by £25 by the government. If you’re in the higher rate or additional rate tax band you can claim a further 25% or 31% respectively, when you complete your tax return.
Do you run a limited company?
If you’re a limited company director and take a high proportion of your income as dividends, it’s a good idea to check whether you can take out a company pension to qualify for tax relief. You would need to be an employee of your own company, however, and work under a contract of employment.
What types of self-employed pensions are there?
There are three types of personal pension:
- Ordinary personal pension – you can invest in a broad range of assets, and an annual charge is usually made as a percentage of the pension pot.
- Self-invested personal pension (SIPP) – typically associated with higher charges, but you also have a broader range of investment choices. This is a flexible option if you want an active role in choosing your pension investments.
- Stakeholder pension – with a stakeholder pension, there’s a cap on charges of 1.5% and no penalty for stopping and restarting contributions. The minimum contribution for stakeholder pensions is only £20 a month, but the choice of investment options may be narrower.
Government-backed pension (NEST)
The National Employment Savings Trust (NEST) pension scheme is used primarily for employed people, but you may be eligible for a NEST pension as a self-employed individual or a company director where there are no other employees.
NEST allows you to make flexible payments to your pension, as long as the minimum threshold of £10 is met, and you can set up a direct debit to make regular payments if you want to contribute every month.
Pension apps and digital pensions
Pension apps, such as those offered by Pension Bee and Moneybox, combine existing pension pots, provide a holistic view of your pension arrangements, and remind you if you’re not meeting your target. Digitising pensions in this way offers considerable flexibility when you’re self-employed, and provides the information you need to make better decisions about your financial future.
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