The number of self-employed people in the UK has been on a steady-rise in the last 15 years. In fact, economic analysts agree that this group, made up of nearly 5 million people, is keeping the economy afloat. However, there are concerns that self-employed people in the UK are not helping their pension pots in the way they have helped the UK economy.
Research shows that only 17 per cent of the self-employed group are consistently contributing to a pension pot. Some of the reasons quoted as the cause of the apathy towards pension savings include confusion about the importance of contributing to a pension, confusion about possible tax breaks and confusion about flexibility. Most self-employed people have fluctuating incomes so they are less open to any scheme that has an air of a lack of flexibility.
If you are in this group, the good news for you is that saving for retirement is more straightforward than you may have imagined. If you already have a system for managing your finances as a self-employed person, you should be able to easily build a pension pot. The different types of pension plans available to you are covered below:
Self-Invested Personal Pension
With a self-invested personal pension, you can choose where your money will be invested and your level of risk-tolerance. This means you can generate higher returns.
However, this pension type is best suited for people that are fully knowledgeable about the pension process. Apart from the complexities surrounding choosing how your pension is invested, the charging structures in place with many providers are complex. The charges are made up of terms like headline management fee, payment transfers, fees for trading and more. This is why research is doubly important before going this route.
A stakeholder pension is a straightforward defined contributions pension scheme. It is one of the best plans for anyone with irregular income because you can make as little as £20 payments each month. If you want to increase your contributions or hold off on contributions for a particular month, there are no charges or penalties to worry about. Additionally, this pension type is based on minimum standards set by government so the charges are some of the lowest you can find.
On the flip side, you won’t be able to determine where your funds are invested. However, this is in keeping with the focus of the pension plan, which is simplicity. Your funds will be invested low risk vehicles with lower returns but you won’t have to worry about the investment details.
With these two options, you can decide on a pension today.
Self-Employed? Why You Should Set up Your Pension Plan Now
A pension holds many benefits for you even as a self-employed person. You may not have an employer making any contributions, but you can still enjoy Income Tax Relief. This means getting a quarter of your contributions sent to your pensions pot directly from the HMRC. So by the time you have paid in £1000 as a basic rate tax payer to your pension pot, the HMRC would have paid in another £250.
Finally, starting early is vital. The longer the money stays invested before your retirement, the higher your chances of benefitting from compounding.