With the number of self-employed people in the UK on the rise, it’s becoming more important than ever for people to be aware of their retirement options as a self-employed person. Pension saving options are better than many self-employed workers realise because although you don’t have an employer making contributions, you do get Income Tax Relief. So, if you are a basic rate taxpayer, then for every sum you contribute, the pension provider will claim 25% of that amount from HMRC.
The types of retirement plan
There are two main pension schemes available to the self-employed person: stakeholder pensions and Self Invested Personal Pensions (SIPPs). Here are the advantages and disadvantages of each.
Stakeholder pensions
A stakeholder pension is one in which you make defined contributions, and it’s pretty easy to start up yourself. It makes the most sense if you have a regular income. Payments can be as little as £20 per month, without the risk of a penalty fee for changing or ending your contributions. Stakeholder pensions have minimum standards set out by the government, so the charges are low.
If you don’t want to choose where your pension is invested, there is a default investment strategy. This will involve low to medium risk investments, which means you may experience lower returns.
Self Invested Personal Pensions (SIPPs)
This offers greater flexibility than the stakeholder option. You can determine exactly where your money goes and decide on the level of risk you want to take. A SIPP offers the potential to generate higher returns than a stakeholder pension with the same investment.
With the wide range of investment options and opportunities for more control over the ones you choose, a SIPP offers plenty of flexibility. However, the charging structures and fees of SIPP providers can be complex, so be sure to do your homework before committing to anything.
The third option
It is wise to put money into an Individual Savings Account (ISA) in addition to a pension plan. This way, you will have easily accessible money for emergencies, in a tax-efficient account. You could go with a cash ISA, a stocks and shares ISA, a Lifetime ISA (for under-40s) or an Innovative Finance ISA. All of these options are suitable for retirement, with their own perks that will help inform your decision of which option to take.
