What is a self-employed pension plan?

If you work for yourself it can be a lot harder to start a pension and to regularly pay into it than for those in full time employment. You won’t get offered a workplace pension scheme, there are no employer contributions and your income may be sporadic, which makes payments more difficult.

However, there are pension plans that you can set up yourself and it makes sense to start paying to them as soon as you can.

There’s actually nothing special about a self-employed pension plan. They are simply pension schemes taken out by self-employed people. However, the type of pension you choose may be influenced by your self-employment status.

There are several self-employed pension options: you may opt for a stakeholder or personal pension or you may go for a Self Invested Personal Pension or SIPP. Each option has its own advantages and disadvantages. For example, a stakeholder pension has relatively low maintenance charges and is also very flexible, allowing you to pay in more substantial amounts when business is good and smaller amounts when times are tougher. Other types of pension may require a minimum payment each month but provide higher rewards.

What are the advantages of self-employed pension plans?

The main advantage, as with any pension plan, is that you won’t have to rely on the state pension once you retire. Instead, you’ll have a decent income that will allow you to enjoy your later years.

As a self-employed person you won’t be offered any occupational pensions but the self-employed can still benefit from tax relief on their pension contributions. Basic rate taxpayers will receive £25 for every £100 they pay into a pension scheme from HMRC.

However, there are limits on the amount of tax relief you may claim. The maximum amount on which you can claim tax relief is known as the annual allowance. For 2015/16 the allowance was £40,000. So although you can pay any amount in to a pension plan, you would only get the tax back on the first £40,000. Of course, you are also limited by your earnings during the year.

Because you can usually carry forward any used allowance to the following year, when your business is booming you may be able to contribute more that the annual allowance in a given tax year.

How do I start a self-employed pension?

Although it is possible to source a pension and start paying into it on your own, you’re probably best to seek some advice. You may wish to start with a pension adviser before you contact pension companies such as ourselves.

How much should I pay in to my pension?

The short answer is – as much as possible. The more you pay in, the more you get out at the end of the pension. Self employed pension contributions are also eligible for tax relief so the more you can pay in, the more money you will get back from the government.

To work out how much you might receive from your pension pot, use a self-employed pension calculator such as the one on our web site.

For independent self-employed pension advice, contact the Pension Advisory Service, a free service that offers info and advice on everything to do with pensions.

When first taking out a plan, it can be tempting to start making very large self employed pension contributions in a bid to quickly build up a nice pot. However, do bear in mind that any money you pay into your pension will not be available to pay bills, buy stock or expand the business.

Can a self-employed pension plan be transferred?

Yes, as with any non-workplace pension, the capital that you build up within a pension plan can be transferred to another plan should you wish to.


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