If you’re self-employed you’ll be well aware of the different and sometimes confusing financial rules which apply to you compared to your otherwise employed friends. Like with most things, your pension will also be different, since you’re self-employed and pay lower rates of national insurance. Conventionally, each person is entitled to a basic state pension, and this includes those who are self-employed. On top of this, if you earn a certain amount you’ll also be entitled to the additional state pension. A lot of people choose to “contract out” their state pension for a private pension. If you’re self-employed you won’t automatically get an additional state pension so you need to start up a private pension as soon as possible, to ensure financial safety in the future.
Different types of pensions for the Self Employed:
There are two different types of personal pension plans available to the self-employed. Below is a guide to both, with a brief overview of what a pension plan is in the first place.
Personal pension plan – a personal pension plan is a basic investment policy for retirement, whereby you end up with a lump sum and an income throughout your retirement. You can get a personal pension plan at any high street bank, investment firm and some retailers, like big supermarket chains.
The pension holder contributes a certain amount of money into the pension which is then invested and should yield returns in order to build up a fund. The amount of pension payable during retirement then is dependent upon how much has been contributed into the scheme, and how well the investment has performed, as well as the “annuity rate”.
25% of the pension can be paid as a tax-free lump sum.
Stakeholder Pension Schemes – a stakeholder scheme is a type of personal pension plan i.e. it is designed to supply you with a lump sum and income in your later years. Stakeholder pensions have a set of minimum rules set out by the government. These include:
– Minimum contribution of £20
– No penalties on transferring the fund to another pension or on increasing, decreasing, stopping or restarting contributions.
– Charges capped at 1.5% of the fund each year for the first ten years and 1% a year thereafter.
Self Invested Personal Pension – A self invested personal pension or SIPP is another type of pension plan which allows the pension holder a lot more control over the investments made with the pension. The same kind of tax, contribution and eligibility rules apply, but with an SIPP an individual can choose where the money is invested.
The plan holder can have direct control over the investment strategy or can hire a stock broker or fund manager to look after the investment. The SIPP is set up as a trust, which means the plan holder can borrow money from the fund to invest as long as the trustees agree it is in the scheme’s interest.
Getting the Advice you Need:
The self-employed are one of the most neglected groups of people when it comes to getting sound financial advice. Between 1998 and 2004 the percentage of self-employed people with a pension plan dropped from 64% to 49% according to the Office for National Statistics, with more than half of self employed women lacking any kind of private pension. This is why a national pension helpline has been set up by The Pensions Advisory Service to offer advice specific to those who are self-employed. If you’re self-employed and thinking about your financial future then it’d be a good idea to speak to a professional financial advisor to get the help you need.
