Saving for your retirement as a contractor

There are currently more than 4.8 million self-employed workers in the UK alone, and this number only increases every year. We know entrepreneurs to take the leap to self-employment at all stages of life, but what happens when they reach retirement age?

A surprising 45% of contractors aged between 35 and 55 have no private pension in place for their future. The chances are that you won’t be able to run your business forever. So, if you’re a contractor, saving for your retirement should be one of your top priorities.

Am I entitled to a State Pension as a self-employed worker?

The self-employed are entitled to the State Pension just like any other worker. As of April 2016, a new flat-rate State Pension has been in place; basing pension savings on your National Insurance record.

It is extremely important to remember that State Pension is unlikely to provide you with enough money to maintain your current standard of living. For the current tax year, state pension stands at £164.34 a week.

As a contractor, building up enough savings for the retirement you deserve will take a lot of careful planning and cooperation with your TWP team to help you prepare for your future.

Why don’t many contractors have a retirement fund?

Often, a large part of the draw to go self-employed is not having a boss. You have the freedom to do what you want, choose your own work, and keep the vast majority of the money you make. However when it comes to your pension, being independent has its drawbacks.

All employers in the UK are legally required to provide a workplace pension scheme, paying into it when their employees do to boost their savings for retirement.

From 5 April 2019, employees must pay in at least 5% of their earnings into their pension fund, and their employer must contribute a minimum of 3% on top.

When you’re self-employed and your business is unincorporated, there is no boss in the picture who will have to add money on top of your pension like this. So, preparing yourself for your later years will likely involve help from the government.

Who pays in to my pension pot?

Of course, you will need to pay in to your pension scheme out of your own income. However, without an employer to top up these savings, the government steps in instead.

You’ll receive considerable tax breaks when it comes to your pension. If you’re a basic-rate taxpayer, for every £100 you pay into your pension, the government will add another £25.

How will my savings look over time?

When it comes to your retirement savings, we always give business owners the same advice; start saving as early as possible.

It is never too soon to start thinking about your future, and the sooner you start contributing to your pension, the more time you can benefit from the tax relief and the more time your savings have to grow.

Your pension pot could more than double depending on when you choose to start saving.

Say you were to pay in £100 to your pension fund and it was matched with the government’s additional £25. If savings were to grow at 5% a year with charges of 0.75% a year, this is how your pension pot would look depending on the age you started to save:

Start saving at age Pension pot at 65 years old
30 £70,000
40 £46,000
50 £25,000

What kind of pension should I use?

Personal pensions are often the most popular choice for the self-employed. They allow you to choose where your contributions are invested and your pension provider claims tax relief on your behalf to add on to your pension savings.

The three types of personal pension include:

  • Ordinary personal pensions
  • Stakeholder pensions (maximum charge capped at 1.5%)
  • Self-invested personal pensions (wide range of investment offers but with higher charges)

You may prefer to instead use NEST (National Employment Savings Trust) to save for your future. With no shareholders or owners, the NEST is run completely for its members.

Whilst NEST is primarily there for employees, the self-employed workers can benefit. Please click here to find out more or speak to your TWP accountant about your savings options.

How much tax relief will I get?

There is no limit on the amount you’re able to put towards your pension every year, however there is a cap on the amount on which you’re able to receive tax relief.

The annual allowance for 2018-19 is £40,000 or 100% of your earnings for the year if you earn less than this. What this means is that you will receive tax relief on your pension contributions up to £40,000. Anything over this figure will not benefit from the same treatment.

So, if you put £45,000 into your pension pot, you will not receive tax relief on the last £5,000 of this. You can, however, carry forward any unused annual allowance from up to three years ago.

We can help

If you’re self-employed and think it’s time to start planning for your future, speak to your TWP accountant today.  Please speak to the team today on 01932 704700.

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