If you’re planning your financial future, you may be wondering what your pension eligibility is. In this guide, we offer some tips on how you can set yourself up for retirement.
What is your self-employed pension eligibility?
Pensions are designed to support older people financially after retirement. As a self-employed person, you are eligible for a defined contribution pension. The amount will depend on how much you pay in during your working life, the return and diversity of any investments you make such as stocks and shares ISAs, any expenses incurred and when you withdraw. You can track how much you are eligible for on the Government’s State Pension forecast at gov.uk.
In order to qualify for the state pension, you will need to have worked for 35 years to be eligible for the full amount, and for at least 10 years to get any state pension at all. The self-employed can make NI contributions as part of a self-assessment tax return or by using National Insurance credits. You should carefully monitor any gaps in your NI contributions. How much you get will ultimately depend on your National Insurance (NI) details, upon reaching retirement age.
Setting up a private pension
Setting up an independent pension may be necessary to top up your income after retirement. Most pension providers will allow flexible payments at a time of your convenience. People who choose this approach are usually entitled to pension tax relief. It is important to maximise your tax efficiency. With a fixed basic rate of 20%, a £100 contribution would cost you £80. A higher or additional income taxpayer in the 40% bracket would see a £100 pension contribution cost them £60. Tax relief is conditional on you not paying in more than you earn and not exceeding the annual allowance.
When and how can I withdraw a self-employed pension?
In the UK, the earliest you can withdraw pension money is usually 55, although this rises to 57 from April 2028. It can be accessed as a regular income or as when required, or as one lump sum or more, of which 25% or less is tax-free. People with pension savings that exceed the annual allowance, usually circa £60,000, should check to see if you can apply the ‘carry forward’ rule, whereby you can draw on unused allowances from the previous three tax years.
Different types of pensions
For people who are self-employed, it is important to select your pension provider yourself. A private or personal pension is usually administered by banks, building societies or insurance companies. There are different types of pension plans available.
One option, for people such as limited company directors, is a Self-Invested Personal Pension (SIPP) which allows you to control your savings and invest in assets such as stocks, bonds or property. Some people may instead opt for a Lifetime ISA (LISA) which are primarily aimed at first-time homebuyers.
Using this scheme, people aged 40 or under are able to save up to £4,000 and qualify for state tax relief. Personal pensions present a cheaper and more flexible solution with a selection of managed investment portfolios. These are relatively simple to set up and are popular with freelancers and entrepreneurs.
There is also the government-backed Nest (National Employment Savings Trust). This is the defined contribution public service workplace pension scheme. It was set up in 2008 to bring automatic enrolment to any workers who qualified. You might consider a stakeholder pension, which is similar to a personal pension but with lower fees.
The Pension Calculator
As someone self-employed, you might choose to use the Government’s pension calculator to estimate your retirement income. If, for instance, you allocate £200 to your pension each month, by the time you reached 65 that pot would be worth £158,000 if you started at 20, £112,000 if you started at 30, £73,000 if you started at 40, and £40,000 if you left it till 50.
Business owners
If you are self-employed and run a limited company, you might choose a specific pension scheme, such as a small self-administered scheme (SSAS) to cover you, your team and family members, totalling no more than 11 people, who assume the role of scheme trustees.
Why planning your future is important
Self-employed people retirement planning in Cheshire or Oswestry may find the whole process daunting, especially when you have to take full control of financial decision-making. To find out more about how to secure your financial security, call our specialist team at Hartey Wealth Management today to get professional advice.
