If you’re a freelancer, contractor or sole trader, then the Government’s auto-enrolment scheme, ensuring employees have a pension beyond the state pension, is just an interesting side-note for you. You know that saving for your retirement is solely down to you, and you’re probably aware that you’re highly unlikely to be able to live on the state pension alone, always presuming your National Insurance Contributions are sufficient to entitle you to it!
Or do you? If a recent Nixon Williams’ survey of 1,000 UK contractors and freelancers is anything to go by, then 64% of the self-employed in the UK are avoiding putting money aside into a personal pension scheme.
Don’t be one of them. The longer you leave saving for your retirement, the harder it becomes, as your money has less time to earn interest and tax relief—remember, even if you don’t pay tax, you still get tax relief on your pension contributions. Why miss out on a 20% bonus or more, if you do pay tax and are a higher rate tax payer.
So how can you go about saving for retirement?
Continue paying into a workplace pension
If you have an existing workplace pension, you may be allowed to carry on paying into it. Check how it is affected by your resignation from your workplace in terms of bonuses, performance and related benefits (life insurance etc.). Freezing it or moving it elsewhere may be a better option.
Standard personal pensions
The conditions are primarily set by the pension provider you choose, who invests on your behalf. How much choice you have between types and risk-levels of investments varies between providers, as does the amount you’re required to contribute, but generally there’s a fixed minimum contribution and providers usually require you to contribute monthly, without a break.
Your provider may give you a choice of funds or pre-built packages of funds to invest in. This can give you the option to go for low, medium, or high-risk investments, types of investment (e.g. green, property, UK) or to mix them. The provider will claim basic-rate tax relief on your behalf, which will be added to your pot.
Currently, you can start drawing retirement benefits at 55 (whether you’re still working or not), and sometimes earlier if you’re suffering from ill-health. You can withdraw up to 25% of your accumulated fund as a tax-free cash lump sum, with the balance used to provide an income.
SIPP (self-invested personal pension)
This is a Government-approved personal pension scheme which allows you to hold various investments including stocks, mutual funds, and exchange-traded funds (ETFs) in your pension pot.
Money in a SIPP can be accessed from age 55 and you can take 25% of your total SIPP balance as a tax-free payment. Charges are often higher than with other types of personal pension, but potential investment types are more varied and you have a great deal of control.
SHP (stakeholder pension)
Stakeholder pension schemes are a type of defined contribution pension scheme that’s Government-regulated and designed to be accessible, flexible and portable. They’re usually offered by insurance companies, investment platforms, banks or building societies. A novel feature is that other people can contribute to your SHP, and you can contribute to the SHPs of others (your partner or your child). They are flexible, so if you begin employment again, you can carry it on and your new employer can choose to contribute to it as they wish.
Currently, you can start drawing retirement benefits from an SHP at 55 (whether you’re still working or not), and you can withdraw up to 25% of your accumulated fund as a tax-free cash lump sum, with the balance used to provide an income.
Government regulations for SHPs mean that:
- You can switch to a new pension provider without incurring a charge from the old provider
- You can start contributions from as little as £20, and pay weekly, monthly or at less regular intervals
- You can stop, re-start or change your contributions whenever you want without penalty fees
- The scheme must be run by trustees or by an authorised stakeholder manager, whose responsibility will be to make sure that the scheme meets the various legal requirements
NEST (National Employment Savings Trust)
While NEST is a Government-funded workplace pension scheme set up for auto-enrolment purposes, you can usually join if you’re self-employed or a sole director of a company that doesn’t employ anyone else. It’s run as a trust by the NEST Corporation for the benefit of scheme members, with no shareholders or owners. If you want to check if you’re eligible, visit NEST’s self-employed page.
An in-house investment team spreads funds across diverse investments from around the world using funds from leading fund managers. Five alternative funds are available to suit different risk level and belief requirements.
Another investment option to consider if you’re self-employed, particularly if you’ve maxed out your yearly pension contributions, is a Lifetime ISA.
Unfortunately, they’re only available to those aged 18-40. You can invest up to £4,000 a year, which will be topped up by 25% by the Government. Investment can carry on until you’re 50, but you can’t touch the money until you either buy your first property or turn 60 (well, you can, but there are expensive penalties involved). Lifetime ISA are available from a variety of providers.
For more information on pensions, check out the Pension Advisory Service webpage.