Pension plans for self-employed: All you need to know

Find out everything you need to know about pension plans for self-employed people, including the various options available to you and when you should seek financial advice.

If you’re self-employed, the importance of setting up a personal pension cannot be overstated. Without one, you may struggle to make ends meet once you reach retirement age.

In this guide, Finance Rate covers everything you need to know about self-employed pensions to help you choose the right plan for you.

Will I get a State Pension if I’m self-employed?

Self-employed people are entitled to a State Pension just like anyone else.

Your State Pension eligibility is based entirely on your National Insurance record. This means you will need:

  • At least 10 qualifying years on your National Insurance record to get any State Pension
  • At least 35 qualifying years on your National Insurance record to receive a full State Pension

However, the current maximum State Pension is only £203.85 a week. On its own, this is unlikely to be enough for you to maintain a comfortable standard of living after you retire.

It’s therefore important to set up your own personal pension and make regular contributions if you’re self-employed. Despite this fact, recent government data suggests that only 16% of self-employed workers are paying into a personal pension.

What pension schemes can I use as a self-employed person?

There aren’t any specific pensions just for the self-employed, but most self-employed people use a personal pension for their pension savings.

Personal pensions (or private pensions as they’re sometimes known) allow you to choose where you want your contributions to be invested from a range of funds offered by the provider.

As with any type of investment, the value of your pension can fluctuate, and how much you get back when you withdraw the money will depend on how well your savings perform and the level of charges you pay.

There are three types of personal pension:

  • Standard personal pensions: This is the most common type of personal pension and is offered by most large providers. You can make regular contributions or one-off payments into your pension pot, and the provider will invest your money into a range of assets depending on which fund you choose.
  • Self-invested personal pensions (SIPPs): This type of personal pension works in a similar way to a standard personal pension, but you get more flexibility with the investments you can choose. You choose and manage your own investments and can make changes and additions to your investments as often as you want.
  • Stakeholder pensions: This type of personal pension is designed to be accessible to everyone and provide you with a flexible way to build a retirement income. As such, they must adhere to strict government conditions.

The earlier you start making contributions into your pension pot, the better.

It gives you more time to:

  • Contribute to your savings before retirement
  • Benefit from tax relief
  • Let your savings grow

NEST Pensions

If you’re self-employed, you can also use NEST (National Employment Savings Trust) to build up your pension pot.

NEST is run as a trust by the NEST Corporation, which means there are no shareholders or owners. In other words, it’s run solely for the benefit of its members.

What are the benefits of setting up a self-employed pension?

As we’ve already discussed, setting up a private pension when you’re self-employed is important to ensure you have enough money to live comfortably in retirement.

However, there are a number of other unique benefits that come with pension plans, including:

  • Low-cost access to professional investment managers who invest your money in a range of assets, managing risk in a sensible way
  • Flexible choice over what you do with your pension savings when you reach retirement, including taking up to 25% as a lump sum without paying tax
  • If you die before 75, your pension can usually be passed on to your beneficiaries as a lump sum without inheritance tax deductions

When should I seek financial advice?

All pension schemes have their pros and cons. There’s no right or wrong answer when it comes to choosing one – this will depend entirely on your own personal circumstances.

If you’re not sure which scheme to save with, you should talk to a regulated financial adviser. They will be able to make recommendations based on your specific needs, finding a solution that is personal to you.

And if it’s further information on pensions you need, that’s where Finance Rate comes in. We provide clear and unbiased information on all things finance, helping you to make informed decisions about the things that matter most.

Explore our comprehensive pensions guide today.

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