Retirement planning for the self-employed

As the inevitable retirement day draws ever closer, a stark reality might hit the self-employed: their business might not be …

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As the inevitable retirement day draws ever closer, a stark reality might hit the self-employed: their business might not be suitable to fund their retirement. For instance, some businesses can’t continue without the owner, while others would achieve a sale price nowhere near high enough to fill the coffers. Only around a third of the self-employed population in the UK contribute to a personal pension, which could leave the non-savers at risk of running out of money.

Here, we look at ways to fund retirement, and the retirement savings options available to the self-employed.

How much money will you need?

Recent research suggests that there are three levels of comfort for retirees, and the report has managed to pin an estimated annual income to each of these.

  • The minimum pension amount for a single person to cover their living expenses and still have a bit left over for other things is £10,200 per year.
  • Those who would like a moderate retirement income that allows a bit more flexibility after the bills have been paid should aim for an annual pension income of £20,200 per year.
  • Retirees who want to travel and enjoy their retirement a bit more should aim for an annual pension income of at least £33,000 per year.

With these figures in mind, you may want to crunch the numbers with the help of a retirement calculator or consider meeting up with a financial adviser to discuss options. While these figures are a guide, it’s important to know what you’re saving towards and whether your savings will suit your desired retirement lifestyle. 

What can you do to fund your retirement?

Here are the main retirement savings options to consider:

Check your State Pension

It’s important to know that you need enough qualifying years of  National Insurance contributions in order to access the State Pension. If you are self-employed, one of the biggest factors affecting your eligibility for the State Pension is whether you have made Class 2 and/or Class 4 National Insurance contributions.

You can check online whether you qualify and what your predicted pension will be, as well as the date you can expect to start receiving your pension. It’s worth noting that you can also top up your National Insurance contributions to make up for any periods during which you may not have been able to contribute. 

Trace previous pensions

If you haven’t always been self-employed, you might have money set aside in pension funds from previous employers. Pension tracing services can scour databases to find any pension funds you may be entitled to.

If you are aware of any pensions you have with previous employers, it’s a good idea to make sure you remain informed of each fund’s growth. It helps to check from time to time – perhaps once or twice a year – to ensure that the funds are still viable and that there is growth. Sitting down with a financial adviser regularly can also help to ensure that everything remains on track.

Start a personal pension plan

A personal pension plan or scheme is a way for the self-employed to save towards retirement. The reason many opt for a retirement savings plan as opposed to other types of investment is that it carries certain tax benefits, such as claiming tax relief on your self-assessment tax return.

It’s worth knowing the restrictions on personal pension plans, such as self-invested personal plans (SIPPs), in terms of how much you can save.

You can access tax relief on pension payments up to 100% of your earnings or the annual allowance, whichever is lower. The current annual allowance for tax-free pension contributions is £40,000. While you may pay more than this into the plan, you will only enjoy tax relief up to the threshold. Any pension contributions above the £40,000 allowance will be subject to an annual allowance charge (AAC).

If you are a high earner, earning £150,000 or more per annum, you will be subject to a tapered annual allowance, meaning your annual allowance will be reduced. For every £2 over your adjusted income of £150,000, the annual allowance will reduce by £1. However, the maximum reduction is £30,000. This means that those who earn in excess of £210,000 per annum won’t lose out completely on the annual allowance, but will have it capped at £10,000. 

The current lifetime tax allowance is £1,055,000. If your pension scheme grows larger than this as a result of contributions, gains, or returns, you may face a tax penalty. You will need to keep an eye on your contributions to ensure you don’t exceed this limit and end up paying additional tax on the difference.

Consider other retirement savings options

An individual savings account (ISA) might also be an option if you need greater flexibility with your pension funds (i.e. if you may need to access the money before retirement) but still want to take advantage of tax benefits. If you opt for a lifetime ISA, however, the funds can only be accessed once you turn 60. Withdrawals before this date are subject to penalties, but such an option can still be handy if there’s a chance you’ll experience a financial emergency.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »