Craig Rickman answers six key questions to help freelancers and businesses owners save enough for their golden years.
Being your own boss, whether you freelance or employ others, has clear and obvious appeal. You have the freedom and flexibility to live your working life on your terms, something that many of us crave, and (to some 
degree) can control how much you earn.
That said, not only is working for yourself hard graft but there’s lots of uncertainty. You also miss out on valuable financial benefits enjoyed by your employed counterparts, notably company pension contributions, which means the responsibility of tucking enough away for retirement rests firmly on your shoulders.
The good news is, with some careful planning, self-employed workers can put themselves firmly on track to live comfortably in their golden years. Here are six key questions to get you started.
1) What’s the best way to save into a pension if I work for myself?
Due to the attractive tax advantages on offer, pensions are of the best ways to save for your retirement. You get tax relief on your contributions and any growth is outside HMRC’s clutches.
But before you start shovelling your hard-earned profits into the tax wrapper, you may need to take a step back. The way you choose to structure your business affairs – either as a sole trader, in partnership with one or more others, or as a private limited company – can determine the most effective way to fund a pension.
Let’s break it down for you and provide some steer on the best way to save.
- Sole traders/partnerships/limited liability partnerships
If you’re a sole trader, or in partnership with one or more others, you are taxed individually on any profits. You also pay class 4 national insurance (NI).
This means that any pension payments you make are treated as personal contributions whether you fund them from your business bank account or not.
So how much can you pay in every year?
Provided the payment is the lower of 100% of net profits or £60,000, you get upfront tax relief at your marginal rate – in other words, the tax you pay on the next pound you earn. This comes in the form of an immediate 25% boost from the government, and if your profits exceed either £50,270 or £125,140, you might be able to claim back an extra 20% or 25%, respectively, on your total contribution via your tax return.
- Private limited companies
Although not technically classed as self-employed by HMRC, many freelancers and contractors choose to use the private limited company structure, mainly for the tax benefits. Alternatively, you could run a small-to-medium-sized enterprise and employ several staff.
One of the upsides is that you have the flexibility to choose how to draw from profits. You can pay yourself a salary, take dividends, or use a mixture of the two.
If you’re an owner/director of a private limited company, you have a couple of options when it comes to pension funding. You can either pay into a pension via the company or make personal contributions as outlined above. But this decision can get a little complicated.
In most cases, making payments from the company is the most tax-effective way. Provided the ‘wholly and exclusively’ test is met – pension contributions are an allowable business expense so aren’t liable for corporation tax, which has a top rate of 25%.
By contrast, any money that you draw as salary to pay into your pension is subject to income tax, and employer (15%) and employee NI (8% or 2%). Upfront pension relief allows you to claw back any income tax paid, but not NI.
A further benefit of making company pension payments is that the 100% of earnings rule does not apply. So even if you draw a small salary and the rest in dividends, your incorporated business can still pay up to £60,000 a year into your pension and save corporation tax.
However, personal payments can still be highly effective for limited company directors, especially if you pay 40%- or 45%-income tax. Due to the complexity here, it’s worth getting some professional advice in the first instance.
2) What type of pension should I choose?
Self-invested personal pensions (SIPP) have several features that can support the needs for self-employed workers, namely the flexibility to pay in regular amounts or single lump sums to suit your cashflow needs.
Importantly, some SIPPs, like interactive investor’s, accept both personal and company payments, a key attraction for owners of incorporated businesses.
3) How much do I need to save?
The Pensions and Lifetime Savings Association (PLSA) recently crunched the numbers and calculated the annual income needed to live comfortably in retirement is £43,ooo or £59,000 for single people and couples, respectively. In terms of pot sizes, assuming you receive the full state pension, this equates to around £600,000 to £800,000.
These figures may look intimidating, but note they merely provide a guide. How much wealth you’ll need to accrue very much depends on the lifestyle you aspire to.
Needless to say, the sooner you start planning for your retirement, the better. Getting out the clocks early means you’ll have more time and scope to save, and your money has longer to grow and benefit from the superpower that is compound interest
4) I have various pensions from previous employment – can I combine them?
The short answer is yes. Another key benefit of a SIPP is that you can consolidate all your existing pensions to keep them under one roof, which could lower your fees, reduce an admin headache, and provide a wider choice of investment options.
But you may need to tread carefully in this area. Some pensions – such as defined benefit and retirement annuity contracts – contain valuable guarantees that would be lost on transfer.
5) How can I supplement my pension income?
Individual savings accounts (ISA) are a great way to save for your future whether you’re employed or self-employed. You can invest and/or save up to £20,000 into the tax wrapper every year and any growth, income and dividends are tax free.
Although pensions come with attractive upfront tax benefits, any withdrawals – except the 25% (capped at £268,275) tax-free lump sum – are taxable, and you can’t access the money until your age 55 (rising to 57 in 2028).
So, it can be worth having some extra funds to dip into – either before or during retirement – that are accessible and won’t trigger a tax charge.
6) Will my business form part of my pension?
If you’re confident that your business can be sold for a tidy sum in the future, then of course factor this into your plans. But try and be as realistic as you can. The risk is you may reach retirement to find your business fetches less than you hoped, leaving you with an income shortfall in later life, and little opportunity to make up for lost time.
Open an ii SIPP
Tax treatment depends on your individual circumstances and may be subject to change in the future.
The ii SIPP is for people who want to make their own decisions when investing for retirement. As investment values can go down as well as up, you may end up with a retirement fund that’s worth less than what you invested. Usually, you won’t be able to withdraw your money until age 55 (57 from 2028). Before transferring your pension, check if you’ll be charged any exit fees and make sure you don’t lose any valuable benefits, such as:
- Guaranteed annuity rates
- Lower protected pension age
- Matching employer contributions
If you’re unsure about opening a SIPP or transferring your pension(s), please speak to an authorised financial adviser.”
