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Self-employed? Here's how to set up a pension

James Watkins - Law on the Web

  1. 14 October 2015
  2. Miscellaneous
  3. 0 comments
Pension nest

If you are self-employed, you might not have given much thought to starting a pension. And you would not be alone – a recent report found that only around 1 in 10 self-employed workers had a pension.

However, unless you are happy to work until you drop into your seventies, eighties and beyond, you should start putting some money aside now.

Fortunately, starting a pension on your own is not as difficult as you might think.

Differences between employed and self-employed pensions

Not having an employer can be a disadvantage in some ways when it comes to pensions.

The main difference between the two is how contributions are made. With a workplace pension, your contributions will be made on a regular basis, automatically deducted from your pay (usually every month).

However, with a self-employed pension, you will need to make your contributions yourself.

You will probably need to think more carefully about your pensions contributions than you would if your employer was dealing with it.

You will also need to calculate the amount of tax relief you can get – this can be quite complicated, and it would be worth talking to a tax adviser.

Also, there is the obvious downside that you won’t have an employer to boost your contributions to the scheme.

Despite these disadvantages, it is still very worthwhile for anyone who is self-employed to contribute to a pension, and there are ways to make things easier.

National Employment Saving Trust (NEST)

NEST was set up for employers to use when auto-enrolment was introduced. However, it can also be used by the self-employed.

You can save a pension through NEST if you are self-employed or the director of a company of which you are the only employee.

Self-employed users can sign up on the NEST website.

Making contributions

If you are self-employed with a NEST pension, you decide how and when to make your contributions – you can set up a direct debit to make your NEST contributions directly, or you can pay them in a less consistent basis.

Paying inconsistently is useful if your income is less consistent – for example, if you are a gardener and tend to make more money during the summer.

There are only two restrictions on how you can make contributions:

  • You must contribute more than £10 each time;
  • You cannot exceed the total annual contribution over the course of a year (£4,700 for the 2015/2016).

Personal pensions

There are other options available for self-employed savers. You can take out a personal pension – these are offered by banks, building societies, and various other pension providers.

If you want to have more control over you pension, you can use a Self-Invested Personal Pension (SIPP). This gives you more (if not total) control over what your pension will be invested in.

This option can be more risky – if you don’t do your research and make poor investments, your pension can end up worth a lot less than it would have been otherwise.

However, with some smart investments, you could receive greater returns on your pension than if you had saved in a more limiting personal pension.

Boosting your pension

There are ways you can boost your pension, such as taking advantage of backdated tax relief allowance. Read our recent blog post on boosting your pension for more.

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