When the responsibility for saving towards retirement falls entirely on your own shoulders, what should you do? Kate Smith, head of pensions at financial firm Aegon, explains below.
Starting your own business and becoming self-employed is an exciting and exhausting time. But being your own boss can have some challenges – saving for retirement might be one of them.
A recent report from Demos supported by IPSE, the association for freelancers and the self-employed, revealed 46 per cent of self-employed people in the UK are ‘seriously concerned’ about their lack of savings.
Going it alone: When the responsibility for saving towards retirement falls entirely on your own shoulders, what do you do? (Stock image)
When moving from employed to self-employed, some people might not know what they can and can’t do when it comes to their existing workplace pension and any previous ones.
When you go to a new employer you are immediately invited to join the company pension. When you are your own boss the only person responsible for your retirement saving is you.
Increasingly people have periods of being employed and self-employed – including at the same time – during their working life. Due to auto-enrolment, many people will have started saving in a workplace pension already.
Some may not be aware that they might be able to keep on saving into their workplace pension once they become self-employed.
If you are self-employed, you will be entitled to the state pension, assuming you make enough National Insurance contributions during your working life, but that on its own is unlikely to see you through retirement.
What are your pension options when leaving an employer and becoming self-employed?
1) Continue to pay in to your workplace pension
What to consider before leaving your old employer
* What you are giving up in terms of pension contributions from you and your employer
* What options are available with your workplace pension once you leave your employer
* How you will continue saving for retirement when you become self-employed.
Some workplace pension schemes allow you to carry on saving once you have left your employer and become self-employed.
Usually contract-based pension schemes – those outsourced to insurers and other providers – offer this option, but you lose the connection to the employer which no longer makes contributions.
Master trust schemes, which run central pension funds for a lot of employers at once, might also allow it. But trust-based schemes, those run on behalf of individual employers by trustees, don’t tend to do so.
Check to see if your pension scheme gives you this option, then decide how much you can afford to pay.
You may not initially be able to match what you and your employer were previously paying into a pension, but put a plan in place to increase your pension contributions over a number of years.
Get into the habit of paying regular monthly pension contributions, just like you did with your workplace pension scheme.
You will continue to get tax relief on your pension contributions at the highest rate you pay income tax, so that will be a useful boost to your savings.
If you use a contract-based scheme, the pension provider will claim tax relief at the basic rate (20 per cent) from HMRC and add this to your pension.
Kate Smith: ‘Some workplace pension schemes allow you to carry on saving once you have left your employer and become self-employed’
If you are a higher rate (40 per cent) or additional rate (45 per cent) taxpayer, you need to reclaim the additional tax relief from HMRC via self-assessment.
Even if you don’t pay tax, you’ll get tax relief on your pension contributions.
You can pay up to £2,880 a year and the Government will top it up by £720 making a total of £3,600 paid into your pension scheme.
2) Leave the workplace pension as it stands
Starting your own business will be a busy time and you will be feeling the financial pressures from all directions, so it’s understandable that a pension might not be on your immediate radar.
When you are leaving your employer you might decide to stop making any contributions.
Your pension provider will continue to manage it, including investing your funds, sending you annual communications, and deducting charges. Depending on the type of pension you can start paying in again at any time.
3) Set up a new pension
You can choose to set up a brand new pension scheme. A financial adviser will help you find the best pension for your circumstances.
How do I set up a pension from scratch?
This is Money’s pensions columnist Steve Webb recently replied to a self-employed reader who wanted to get started saving for retirement.
Read his tips on how much to save, where to invest, and how much you can expect to be charged.
This means looking at whether there’s a minimum pension contribution, inbuilt flexibility for paying irregular contributions, charges, investment options, online tools and flexibility around how you’ll take your pension income when you come to retire.
Alternatively you could ask one of your previous pension providers about setting up a new pension with them, or shop around yourself.
4) Combine your pension pots
Increasingly people will have more than one pension as they’ll have spells of employment, each often with a pension.
It can be difficult to keep track of multiple pension pots. So you could think about combining all your pension pots into one and then make new pension contributions into this.
This could involve using one of your old existing pensions or using a brand new one. You would be best speaking to an adviser about this to ensure this is the best option for you.
What if you take on employees of your own?
As soon as you start employing staff you need to set up an auto-enrolment pension and start paying pension contributions.
You will need to auto-enrol all eligible employees, aged between 22 and state pension age, and earning over £10,000 a year, into a pension scheme. Here’s five tips to get you started.
* Choose a pension scheme, with the help of a financial adviser. Plan ahead as this could take time.
* Work out who you need to put into the pension scheme and start paying pension contributions.
* Tell your employees about the pension scheme and what contributions they need to pay.
* Work with your payroll provider to make sure the right pension contributions are paid at the right time.
* Complete an online declaration of compliance within five months telling the Pensions Regulator how you have complied with your auto-enrolment duties. If you don’t do this you will be fined.
The Pensions Regulator has lots of useful information, including templates, to help you comply with your auto-enrolment duties.
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