Pension contributions for self-employed

If you’re self-employed you’re entitled to the basic State Pension in the same way as anyone else. The full basic State Pension is currently set at £115.95 a week, and getting that full amount you need 30 qualifying years of National Insurance contributions or credits. This means for 30 years at least one of the following applied to you:

£115.95 per week is not much so what are the options if you are self-employed and want to contribute into private pension schemes.

Being self-employed, you won’t have an employer adding money to your pension but your contributions will be topped up by income tax relief from HM Revenue & Customs (HMRC). If you’re a basic-rate taxpayer, for every £100 you pay into your pension, HMRC will add an extra £25.

There’s a range of different types of pension schemes you can set up, including stakeholder pensions, personal pensions and SIPPs (Self Invested Personal Pensions). Each has its pros and cons.

Stakeholder pensions

  • Stakeholder pensions are available to almost everybody, including people in employment, fixed contract staff, the self-employed and people who are not actually working but can afford to make contributions. It’s also possible to contribute to someone else’s stakeholder pension – for instance someone can make contributions to their non-working partner’s stakeholder scheme on their behalf. They have relatively low charges and are flexible.
  • You can save as much as you like towards your pension each year, but there’s a limit on the amount that will get tax relief. The maximum amount of pension savings that benefit from tax relief each year is called the annual allowance. The annual allowance for 2015-16 is £40,000. If you go over £40,000, you won’t get tax relief on further pension savings.
  • You can carry forward unused annual allowance from the previous three years. If your income varies significantly from year to year, unused allowances can allow you to maximize your pension savings in years when your income is high. However you must have been a member of a pension scheme during the years you want to carry forward.
  • Please note even with unused annual allowance carried forward, your tax relief is limited by your annual earnings for the year in question.
  • If you save more than your annual allowance you may have to pay a tax charge.

Personal pensions

A personal pension is one way you might choose to save for your retirement. Personal pensions can also be called defined contribution (DC) schemes. They may be suitable for you if:

  • you are working but are not eligible for automatic enrolment into your employer’s pension scheme
  • you’re self employed or
  • you’re not working.

A personal pension works like this:

  1. you make regular payments (contributions) into your pension fund. This is the pot of money you build up while working and use when you retire, to give you an income
  2. you may receive tax relief on these regular payments
  3. the fund is invested, for example in stocks and shares, with the aim of increasing the amount in it over the years before you retire
  4. when you retire, you have a number of options on how to take the money in your pension pot.

Self-invested personal pensions (SIPPs)

  • SIPPs aren’t for everyone. Get advice if you’re thinking about this type of personal pension.
  • With standard personal pension schemes, your investments are managed for you within the pooled fund you have chosen. SIPPs are a form of personal pension that give you the freedom to choose and manage your own investments. Another option is to pay an authorised investment manager to make the decisions for you.
  • SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they want to. SIPPs can also have higher charges than other personal pensions or stakeholder pensions. For these reasons, SIPPs tend to be more suitable for large funds and for people who are experienced in investing.

Most SIPPs allow you to select from a range of assets, such as:

  • Individual stocks and shares quoted on a recognised UK or overseas stock exchange
  • Government securities
  • Unit trusts
  • Investment trusts
  • Insurance company funds
  • Traded endowment policies
  • Deposit accounts with banks and building societies
  • National savings products
  • Commercial property (such as offices, shops or factory premises)

These aren’t all of the investment options that are available – different SIPP providers offer different investment options.

It’s unlikely that you’ll be able to invest directly in residential property within a SIPP. Residential property can’t be held directly in a SIPP with the tax advantages that usually accompany pension investments. But, subject to some restrictions, including on personal use, residential property can be held in a SIPP through certain types of collective investments, such as real estate investment trusts, without losing the tax advantages. Not all SIPP providers accept this type of investment though.

Main pension providers for self-employed:

You can find more information about pension scams here

Thank you for reading.

Ernesta Jonkute MICB. PM. Dip, Certified Bookkeeper.
01273 965681
07724 002951

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