Investment and retirement considerations for self employed

You might enjoy the benefit of being in charge of your own work, but you can end up paying for this freedom in other ways.

All companies that employ people now have a responsibility to provide pensions to their employees, but it’s just one of the many things a self-employed person will have to take care of themselves.

So if you are self-employed, you risk being left behind when it comes to retirement saving, as well as other long-term benefits - unless you take a few simple steps.

Set up a pension

Over 4.8 million people are self-employed, yet approximately 45 per cent of those aged between 35 and 55 have no private pension*, which means they are missing out on key tax advantages.

As a general rule, to work out how much you should be paying into a pension every year, divide your age when you started the pension by two then save this percentage of your gross income into it each year. So, for example, if you started saving for your pension at 28-years-old, you should be saving 14 per cent of your gross income each year; if you started at 40, it would be 20 per cent.

Over 4.8 million people are self-employed, yet approximately 45 per cent of those aged between 35 and 55 have no private pension

A flexible way to plan for your retirement is using a Self-Invested Personal Pension (SIPP) where you can make regular contributions, change the amount, suspend them and make additional lump sums in your good trading years to make up for any years when business was not so good.

If you are employed by the company you own, then the company can also make a pension contribution on your behalf and this is treated as a trading expense to reduce the company’s tax liability.

Self-employed workers can personally invest (from a private bank account), up to 100 per cent of their salary into a pension (there’s an annual maximum of £40,000) and receive income tax relief at 20 per cent for basic rate taxpayers and 40 per cent for higher rate taxpayers.

You can transfer former workplace pensions from previous employers into your SIPP and manage them all in one place.

What type of pension suits self-employed people?

Most pension providers allow you to stop, start and change the level of contribution whenever you want.
Self-employed people have the same pension options available to them as employed people. These are: private, stakeholder, NEST (the national pension scheme set up for auto-enrolment) and SIPPs.

SIPPs can be popular with the self-employed, who are used to managing their finances on their own, because they allow savers to choose what they want to invest their pension savings in, rather than deferring the decisions to a pension fund manager.

You may be worried about fixing your monthly pension contributions when your income is irregular. You needn’t, because most pension providers allow you to stop, start and change the level of contribution whenever you want.

Alternatively, you can set a low minimum monthly contribution and then top up on an ad hoc basis whenever you are able to make a larger contribution.

Other considerations

Besides your long term retirement saving, there are other needs to take into account to protect your savings now, and in the future.

As well as setting aside a portion of income for retirement, it’s important to have a short-term savings buffer if you are self-employed, to help you ride out any immediate cashflow issues or pay for any other emergency, business-related outgoings, such as equipment.

Three months’ worth of income is often quoted as a useful cash buffer for anyone who is self-employed. This can help to cover fallow periods, when you are not earning income but may be investing in, for example, research or training instead.

Life and income protection insurance

Life insurance is not costly but it is vital if you are self-employed, to make sure your family have costs covered if anything happens to you.

Income protection is designed to pay you a monthly amount if you are unable to work due to ill health and is also sensible for self-employed people to set up – employed people often receive this as an employee benefit.

Private health care

The benefit of private health care is often provided by employers. If this is important to you, there are a range of plans that you can set up as an individual.

*This is Money (link)