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Self-employed? Your pension questions answered

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It’s all too easy to forget to get a pension when you’re your own boss. But the fact is that – self-employed or not – saving for your future is vital if you want a comfortable retirement. We answer some of your key questions here.

There has been a huge rise in the number of people working for themselves since the turn of the century, with 4.8 million people now self-employed, according to the latest government figures. Yet only 14% are paying into a pension – less than half the percentage who were contributing to a scheme in 2005/06.

By contrast, the number of employed people who are saving for retirement is looking relatively healthy at over 15 million, thanks in part to auto-enrolment – a government initiative which has seen millions automatically placed into pension schemes by their employer.

Self-employed numbers up – but retirement saving down[1][2]

Graph detailing personal pensions vs self-employed people

When you’re working for yourself, it’s understandable that you want to spend every hour making your business a success – meaning things like saving for your future can slip down the priority list. The trouble is, if you don’t act, you could find yourself struggling financially when you come to retire.

So if you’re self-employed and wondering whether you need a pension, we’ve put together some answers to a few of the questions you might have.

Q: Retirement’s ages away. Do I really need to save for it?

A: Yes. If you want to enjoy a similar standard of living to the one you have now, that is.

While some of your living costs will probably reduce when you retire, you’ll still need a fair amount of money to live on. Government research[3] suggests you’ll need between 50-70% of your pre-retirement salary when you finish work. And while there is the State Pension, even if you get the current amount of just over £8,000 a year it’s unlikely to be close to what you need.

As Alistair McQueen, Aviva’s Savings & Retirement Manager, says: “Being your own boss has many attractions, but unfortunately it won’t stop us from growing old. Whether you’re employed or self-employed, one day you’ll want to stop working. When that time comes, you’ll need another source of income – and that is where a pension can come in.”

Q: Why a pension and not something else?

A: There are other savings and investment accounts you can use to save for your retirement – such as cash ISAs or the new lifetime ISA (due to arrive in April 2017). But the fact is that pensions are purposely built for the job, and come with tax benefits you won’t get elsewhere.

With pensions, the government gives tax relief equal to the highest rate of income tax you pay. Thanks to this, if you’re a basic rate taxpayer you only need to contribute £80 to end up with £100 in your pension. And if you’re a higher or additional rate payer, you can claim even more tax relief when you fill out your self-assessment tax return.

One thing to note is that there’s an annual allowance which limits how much can be contributed into your pension each year while still receiving tax relief. It’s based on your earnings and is currently capped at £40,000.

Five pension tips if you’re self-employed

  1. The sooner the better
    When it comes to pensions, it pays to be an early bird. The sooner you start paying in, the more tax relief you’ll get from the government, and the more time your money has to potentially grow.
  2. Try to pay in a regular amount
    The thought of saving a large lump sum to pay into your pension can be daunting. So pay in what you can on a regular basis – getting into the habit of saving for your future is half the battle for many people.
  3. Increase it when you can
    If your earnings increase or you land a big contract, consider increasing your regular payments or paying a lump sum into your pension.
  4. Picture your future
    If retirement is still a way off, it can be hard to think of your future self and no longer working. So instead, picture the dreams and goals you’d like to pursue when you finish working. Thinking about the positive benefits of saving can be a good motivational tool.
  5. Have a regular review
    Once every six months, take a look at your pension and consider whether you’re on track to save enough. You can use our My Retirement Planner tool to help you with this. Just enter a few details and it will show you what you might get back, based on your current savings.

Just remember that as with most investments, the value of your pension can go down as well as up, and you may not get back as much as has been invested.

Q: OK, so how much should I be putting away?

A: As we mentioned above, typically you’ll need between half and two-thirds of your current salary to support a similar lifestyle to the one you have now. As for exactly how much you need to stash away in your pension, it depends mostly on how soon you start. Usually, the earlier you begin, the less you’ll need to pay in each month to be able to afford a comfortable retirement.

If you’d like an idea of how much you should be saving, the easiest thing to do is to use an online calculator like our My Retirement Planner. Tools like this are simple to use, and you can see what sort of an income you might end up with, based on different monthly pension contributions.

Q: Will I benefit from auto-enrolment?

A: Not at the moment, although the government is due to review things this year (2017).

In case you haven’t heard of it before, ‘auto-enrolment’ is the name of an ongoing government initiative that was introduced in 2012. Under the scheme, millions of UK employees have been automatically enrolled into workplace pension schemes, with their employers making contributions into their pensions on their behalf (you might have seen some of the ads).

As Alistair McQueen says, “Auto-enrolment has been seen as a great success, but it has done nothing for the self-employed. Encouragingly, the government have confirmed they will consider this issue and are due to make recommendations by the end of the year.”

In the meantime, the fact that you can’t take advantage of it makes it even more important to start saving for your future self soon.

Q: What should I look for in a pension?

A: Once you’ve decided to take the plunge and get yourself a pension, you’ll find there are several different types – offered by a number of different providers (ourselves included). Here are some of the things you might want to consider when you’re choosing one for yourself:

Flexibility
If your earnings fluctuate, it can be a good idea to choose a pension plan that doesn’t tie you in to investing a set amount each month.

Fund choice
Some pensions offer more investment choice than others, giving you more ways of potentially growing your pot.

Charges
Pay close attention to how much you’ll be charged, as these charges reduce the amount in your pension pot.

Convenience
Check out how easy it will be to monitor and manage your pension online. Is it simple, or simply a pain?

At Aviva, we offer a SIPP (self-invested personal pension) which offers a range of over 2,000 funds, easy online management through MyAviva, and allows you to stop, start or change your regular payments whenever you want.

Independent financial services consultancy the lang cat recently voted ours the best investment platform for beginners. So if you’re looking for a simple and convenient way to start saving for your retirement, it could be a good option.

Take a look at the Aviva Pension now

Self-employed and want to save for your retirement? The Aviva Pension could be an ideal choice. Here are just some of the reasons why:

  • Investment options to suit everyone, whether you’re new to investing or not.
  • Pay in regularly, make one-off payments or both.
  • Easy online management through MyAviva.
  • Aviva Platform voted Best for Beginners in 2016 by independent financial consultancy the lang cat.
  • The value of investments can go up and down, so you can get back less than has been paid in.

Find out more

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