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How to save for retirement if you’re self-employed

self employed pensionBeing your own boss, more flexible hours or just pioneering your brilliant idea: there are many good reasons why people become self-employed.

The flipside of working for yourself is giving up all those lovely benefits you receive from an employer. A company car, gym membership and even health insurance, if you’re lucky. The real draught you feel though is pension contributions.

Saving for retirement is usually the last priority for those setting up their own businesses. The statistics bear this out. Nearly two-thirds of self-employed people (62%) currently have no form of pension savings, says a report by savings manager Fidelity International. This is a big contrast to employed people where only 32% currently have no pension savings.

Non-saving by the self-employed generally boils down to lack of cash. According to the report, 70% of self-employed people who aren’t saving for retirement say it’s because they can’t afford it. But I think that’s not the whole story. From my own experience, I’d say that without easy access to a company pension scheme, it’s just a massive faff to sort out. Who wants to think about pensions when there are clients to help or products to shift?

Sadly there’s no way around it. Especially for women, what with state support shrinking and the fact we’re all living longer, a pension is crucial. The earlier you start saving, the longer the stock market has to grow your cash into something you can live off later. And it doesn’t have to be mega-bucks. You can invest in some schemes from as little as £25 a month. Every little helps, as they say, so here are my top two ways to get you started.

1. Isa

You can put up to £20,000 this tax year into an Isa. Once inside the tax perk wrapper, the money can be invested in cash, bonds (loans to governments or companies traded on the stock market) or shares. Any gains are tax-free. In some cases, Isas are free of inheritance tax too.

You can get the money back whenever you want – useful flexibility for the self-employed. Cash Isas are available from high street and digital banks. It’s cheapest to operate an investment Isa online with a platform such as Fidelity Isa*, Hargreaves Lansdown or Interactive Investor.

See our SMM guide to Isas for more tips.

2. Sipp

You can put up to 100% of your income, capped at £40,000, into a pension every year. For the self-employed, the easiest way to save is probably with a self-invested personal pension (Sipp). Again you’ll need an online platform such as Fidelity Sipp*, AJ Bell or Bestinvest. You’ll also need to choose your own investments.

The major perk with a pension is that the government gives you the tax back on the money you save at your marginal rate. So for basic-rate taxpayers, saving £80 actually means £100 is put away. It’s free money! Even if you don’t work or pay tax, you can still put away £2,880 a year which the government tops up to £3,600.

The disadvantage to a Sipp is that you can’t get your money out until (currently) age 55. Also, when you withdraw the cash, apart from a tax-free sum, it will be counted as income and taxed as such. The Sipp can be passed on when you die, although the beneficiary will most likely have to pay income tax on the proceeds.

See our SMM guide to personal pensions for more information.

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Friday, 24 May 2019