What to Do About Your Pension if You’re Self Employed

It comes as little surprise that one in seven UK workers are self employed. There are many perks to being self employed, such as the ability to set your own working hours, determine your own salary and have nobody else to take orders from but yourself.

Being self employed truly is the holy trinity for those who value the above virtues more than corporate values. Then there are also those for whom being self employed is more of a necessity than a choice.

But there is a slight inconsistency in the perks of being self employed and it is known as pensions. Previously there were no provisions in place for those were employed in non government jobs to provide a retirement income for themselves.

However, with the automatic enrolment into Workplace Pensions it is now possible for millions of UK workers to make contributions to their own pension fund.

But the benefit doesn’t extend to those who are self employed which brings us to the question- ‘what can self employed individuals do about their pension?’.

Following are certain things that those who are self-employed can do to secure their retirement:

Consider the benefits of pensions

The government provides a certain amount of tax relief on pension contributions which have been specially designed to help you to save toward retirement. This tax relief means that the government will be adding to your fund a percentage of your contributions.

Depending on your income tax rate you will get a proportionate amount of tax relief. You will receive a tax relief of 20 percent if you pay income tax at the rate of 20 percent. Your contributions will attract 40 percent if you are a higher rate taxpayer.

The maximum amount of tax relief that a person can get each year corresponds to 100 percent of their income or £40,000. You should get in touch with a financial expert if you have been contributing a huge sum in order to avail greater tax relief.

Adjust your Contributions

Depending on your business model and industry, it is possible that your income may fluctuate every month. Therefore, it makes sense for you to raise your level of contributions when times are good and when the cash flow gets tighter you should reduce the amount.

Understand How State Pension Works

Depending on the employment type there are different types of national insurance payable. It is possible that you may have to pay Class 2 and Class 4 contributions if you are self employed but it depends largely on your annual profits.

For the 2018-19 tax year the threshold for the earnings of self employed people has been set at £6,205. Those who earn more than this amount will need to pay Class 2 contributions. Similarly, those who earn more than £8,242 are required to pay Class 4 contributions.

Consult a Professional

Irrespective of the amount of money that you decide to put aside for the future, you must applaud yourself for having this thought and taking this step toward building your pension fund.

But your efforts shouldn’t ideally end there. Another important aspect that you must take into consideration which is necessary to ensure that you have saved enough, is determining the amount of savings that you must have at the beginning of your retirement.

You can determine this by talking to a financial planner or adviser and gain an insight into:

  • Your current circumstances
  • Your ideal retirement income
  • The financial gap between the two
  • What options do you have to bridge the gap?

A financial planner or adviser is the person who is in the best position to take you through the various strategies that you can employ to build up your pension fund. In this way you can ensure that you have enough money saved to generate the income that you may need upon retirement from your services.

Engaging with a specialist can give you a lot of confidence that you are on the right track with respect to your finances and that you are taking financial decisions which are best suited to your circumstances.

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