Independent Workers: Don't Overlook Retirement Planning with a Pension Scheme
Ready to dive into the realm of self-employment? While it offers freedom and flexibility, it's essential not to overlook the essentials, especially setting up your pension.
Statistics show that a staggering 84% of self-employed folks fail to pay into a pension – yikes! Even though you can claim the state pension, it likely won't be enough for a comfy retirement. Contributing to your own pension is key – you'll have more retirement options, and you can access it earlier, currently at 55 (increasing to 57 by 2028).
Not only that, but you'll also reap tax benefits. Basic taxpayers enjoy a 20% top-up on contributions, and higher-rate taxpayers get a 40% bonus!
Now, let's discuss the pension options available. Setting up a personal pension might seem daunting, but it's not as difficult as it seems. There are two primary choices: personal pensions (or private pensions) and Self-Invested Personal Pensions (SIPPs). You can also opt for a Lifetime ISA.
Personal pensions come with run-of-the-mill fund managers who handle your investments for a fee. Minimum savings and contribution limits often apply. Consider joining the National Employment Savings Trust, a government-backed pension provider, or choose from familiar names such as Standard Life, Aviva, AJ Bell, or Hargreaves Lansdown.
SIPPs, on the other hand, are more hands-on. If you're new to investing, they may not be your cup of tea. SIPPs provide the self-employed with the power to choose their investments and the ability to create an investment portfolio. Platforms like interactive investor offer numerous investment options.
Lifetime ISAs let you contribute up to £4,000 annually, with a 25% government top-up. The income is tax-free. While the contribution limit is smaller than the one for pensions, it might be handy for those with smaller earnings as their businesses start.
However, remember that you can't access a Lifetime ISA penalty-free until age 60, and if you withdraw it before 50, you'll pay a 25% exit penalty. Also, you only receive the bonus until age 50, while SIPPs provide tax relief until age 75.
There's no one-size-fits-all solution – choose the option that suits your risk appetite and involvement level. Regardless of the path you choose, don't get so caught up in managing your business that you neglect saving for your future.
Lastly, choose the right SIPP for your portfolio size, as fees tend to vary. Happy investing!
Investing in a personal or Self-Invested Personal Pension (SIPP) can offer tax benefits, as basic taxpayers receive a 20% top-up and higher-rate taxpayers get a 40% bonus on contributions. Although setting up a personal pension might seem complex, it is crucial for self-employed individuals to secure their financial future during retirement. SIPPs provide the self-employed more control over their investments, allowing them to create a customized investment portfolio, but may require a higher level of investment knowledge.
