Table of contents
Table of contents
Without an employer handling your pension contributions for you, it can be easy to neglect a retirement savings plan entirely.
But that is exactly why it’s so important.
In this article, we’ll go through the various options available to you when it comes to saving for retirement as a sole trader, and hopefully help you decide which one is the best fit.
If you’re self-employed, you know what it’s like to have to be your own boss.
When there’s no one shouting down your ear and keeping you on track, you have to step in and be that outside force for yourself. It isn’t always easy. Yes, sorry, great pep talk, but self-employment does demand self-awareness and discipline.
It’s pretty understandable. You’re unlikely to see your retirement fund for decades anyway, and so you may just be tempted to hold on to that extra cash and put it to use in the here and now.
The reality is that pensions are just as important for self-employed workers as they are for those in more traditional employment.
After all, when you’re old and grey, you’re old and grey. We really need to work on our motivational speaking, don’t we?
The short answer is maybe.
Providing you’ve made enough National Insurance Contributions (at least 10 years’ worth) or accrued enough credits to qualify, then you’ll be entitled to receive the State Pension once you reach retirement age.
You’ll need to have made at least 35 full years of contributions to get the full weekly rate.
Even if you are eligible to use the State Pension, though, it might not be enough to cover a comfortable twilight period, plus the age at which you can access it seems to be steadily rising over time.
Thankfully, the State Pension is just one option for self-employed workers.
There are other ways to save which you can use to add to your retirement fund, and these can be flexible depending on how much you can afford to save.
Most pensions work by adding the money you contribute into a pension fund, which is then invested on your behalf. The hope is that you’ll end up with more in your pot than you originally put in, because the investment will accumulate interest on top of your original savings.
This is perhaps the most traditional option, and there are different types of retirement pension pots to choose from depending on your specific needs and how much control you want over what happens to your money.
Your money will usually be protected from things like bankruptcy and Inheritance Tax, and you get a government top-up in the form of tax relief.
One big consideration, though, is that when you make a withdrawal, only the first 25% is tax-free. The rest is subject to Income Tax.
These can be particularly useful for self-employed individuals who fail to qualify for other pension schemes.
A stakeholder pension is what’s known as a defined contribution scheme, which means you invest in a pot of money, and then gain access to that money when you reach retirement.
There are specific government requirements which stakeholder pensions must meet, and so they tend to offer more flexibility.
You might also be able to make much lower payments (starting at £20 a month), and just like with other pensions, you’ll receive a government top-up based on what rate of tax you pay.
All in all, a stakeholder pension is a nice, stable choice, but it might not deliver the kind of growth you’re hoping for.
On the complete opposite end of the pension spectrum, a Self-Invested Personal Pension (SIPP) affords you a higher degree of control over your investments.
Just like other pensions, they allow you to save for retirement, but these give you more control to choose exactly where your money gets invested.
Greater autonomy is great if you know what you’re doing, but be aware you won’t get any help from the government, and you’ll also need to take much more of an active role in terms of managing your pension pot.
Okay, they’re not strictly pension-related, but ISAs are usually seen as another long-term saving option which makes them useful for retirement planning.
There are lots of different types of ISAs on offer from various providers, but they tend to be united by the fact that you won’t pay tax on any interest you earn from one. The current annual allowance you can save into an ISA and remain tax-free is £20,000.
You might also consider the Lifetime Individual Savings Account (LISA), which currently permits savings of up to £4,000 a year, up until a person turns 50.
On top of this, the LISA benefits from a 25% top-up from the government each year (up to a maximum of £1,000), and it’s also exempt from any kind of tax.
When you do reach the age of 50, you’ll stop being able to pay into your LISA or earn the 25% bonus.
Umm – well, we can’t really answer that for you. Ultimately, there are pros and cons to each one – and these will vary wildly depending on your needs and circumstances.
For some people, the best approach is to mix and match because this allows you to have your cake and eat it, and also spread your investments.
For example, while stocks and shares can be a good option if you want more control, they probably shouldn’t be your only method of saving for retirement because of the high risk.
Decide what your priorities are and do some further research in order to arrive at the option that makes the most sense for you, based on your own unique situation.
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A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people!
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