Retirement Saving for Self-Employed People

Even if you’ve only just started thinking about saving for your future – that’s still great news! Without an employer to take care of pension contributions on your behalf, it can be all too easy to neglect a retirement savings plan.

It’s understandable. The terminology can be complicated, no one teaches you about them, and when income fluctuates, it can feel safer to hold on to the cash. It’s hard to get into the habit of saving for a fund you might not see for decades, isn’t it? But that doesn’t mean that pensions aren’t important for self-employed workers.

What about the State Pension?

Providing you’ve made National Insurance Contributions you’ll be entitled to receive the State Pension once you reach the age requirement. It’s no secret though, that the amount you’ll get will be less than impressive, or that retirement age has increased. Compared to your potential income as a self-employed worker, the State Pension is unlikely to provide the relaxing retirement you’re probably hoping for.

That’s why it’s recommended that everyone top up their pension whenever possible, which is the rationale behind the auto-enrolment scheme. It encourages those who otherwise wouldn’t have thought about pensions to save. The bad news for self-employed people is you don’t get auto-enrolment so it’s up to you alone to save for a pension. Don’t worry, there are other options available!

Saving into a pension pot

Pensions are the traditional option, with many different types of pension pot to choose from depending on how much control you want over your investments. The main benefit of a pension pot is the government top-up in the form of tax relief.

As a pension, your money is also protected from things like bankruptcy and inheritance tax. Other retirement options such as ISAs are considered assets and as such won’t be safe from those. The downside to pensions is that when you make a withdrawal, only the first 25% is tax-free. The rest will be subject to Income Tax.

Saving with an ISA

More people are considering using an ISA for their pension, particularly since the Lifetime ISA launched. The LISA can be used to save for a first house or for retirement, currently allowing savings of up to £4,000 a year.

The LISA benefits from a 25% top-up from the government each year, and it’s not subject to tax. You can withdraw the money anytime, but to do so without incurring a 25% penalty from the government, you’ll either need to be aged 60+, or using the money towards buying your first home.

Stocks and shares

If you fancy trying the stock market, you can invest your money exactly where you want and then put the returns towards your retirement. This is essentially how pension pots work, but if you go it alone, you have full control to invest and use the returns whenever you want. The downside to investing in stocks and shares alone is that you don’t get any top-up from the government which you would with a pension pot. That means you could be missing out on a huge amount of free cash.

Stocks and shares are a good option if you can handle risk and want to invest long term, but they probably shouldn’t be your only method of saving for retirement. Especially if you’re not too sure what you’re doing!

Which is the best retirement option for you?

As you can see, there are pros and cons to all of the above options. In an ideal world, you could make use of a few methods of saving for retirement to spread your investments. Take time to work out what your priorities are, and do some research into what’s available, and how it can support your retirement goals.