Can I set up a pension if I’m self-employed?

Being self-employed can bring with it many benefits, not least a more flexible lifestyle and the autonomy to drive your business in the direction you choose. On the flip-side, there are also potential draw backs such as not enjoying the benefits often provided by employers and potential financial uncertainty, both now and in the future.

Personal Pension Funding

Since auto-enrolment was introduced in October 2012, a requirement has existed for employers to automatically enrol their eligible workers into a suitable workplace pension scheme, however the responsibility for pension funding for the self-employed lies firmly in their own court.

For the self-employed, putting in place a strategy to save for retirement can be more difficult than for those in employment. This may be due not only to uncertainty regarding potentially fluctuating, irregular income but also a lack of understanding of the broad range of pension options available, without the clarity of a company structured scheme in place.

Whilst pension contributions can certainly be made on a regular monthly basis, it is also possible to contribute on an ad-hoc basis, which can be particularly attractive to the self-employed due to the structure of their income.

Following the Spring Budget in March 2023, the UK Government increased the Annual Allowance (the maximum pension contribution eligible for tax relief) to £60,000, or 100% of earnings if lower, for tax-year 2023/24.

Effective pension funding is a tax-efficient way of saving for your future, with tax relief available at your highest marginal rate of Income Tax, meaning Additional Rate taxpayers will receive 45% pension tax relief.

There may be even greater tax benefits of pension funding if you earn over £100,000 and fall into the ‘60% Income Tax Trap’, due to the tapering of your Personal Allowance.

In addition, you may be able to take advantage of carry-forward allowance for the previous three years’ unused Annual Allowance, which represents an important financial planning opportunity when considering future retirement or wider estate planning.

Self-Employed and the State Pension

If you are self-employed, your future State Pension entitlement will be based on your Class 2 National Insurance Contributions (NICs), therefore it is key to ensure you have made sufficient contributions to receive the full State Pension in retirement.

That said, the full State Pension will only provide an income of £10,600 per year (2023/24) from age 66 (or age 67 for those born after April 1960), with the State Pension Age being kept under constant review, and likely to be pushed back further.

The State Pension alone is unlikely to provide sufficient income in retirement, and with the prospect of working into your late 60s being an unappealing one for many, seeking professional financial planning advice sooner rather than later could be the first step in achieving the financial security and retirement you are aiming for.

If you require support and advice in reviewing your existing pension arrangements and/or putting in place a pension fund for future contributions, please speak to a member of our financial planning team on 01223 233331 or email info@mmwealth.co.uk.

Disclaimer

Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.

The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The Financial Conduct Authority do not regulate tax planning.