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Millions of self-employed workers have no retirement plan

How you can save for retirement if you work for yourself

Millions of self-employed workers are approaching retirement age with no pension, according to a new survey.

Insurer Aegon polled self-employed workers aged 55 to 65 and found that one in seven (15%) said they were yet to open a private pension. This equates to roughly 1.2 million people across the UK.

More than half (56%) admitted they had no retirement plan in place at all, with many expecting to work past state pension age in order to fund a comfortable retirement.

Find out more: pensions & retirement hub – all you need to know about your retirement options

How can the self-employed fund their retirement?

State pension

The self-employed can build up contributions towards the state pension – worth £159.55 a week or almost £8,300 a year – through paying National Insurance.

They do this by making Class 2 contributions or Class 4 contributions.

Class 2 contributions are £2.85 a week for the 2017-18 tax year, while Class 4 contributions are:

  • 9% of taxable profits between £8,164 and £45,000.
  • 2% on profits over £45,000

You need 35 years’ worth of National Insurance contributions to qualify for the full state pension.

And if you’ve missed any years, you can top up your state pension by purchasing voluntary contributions.

Find out more: State pension explained – all you need to know

Personal pensions

Although self-employed people are unlikely to be able to save into a company pension – and get their hands on generous employer contributions – it’s still worth opening a private pension.

Every contribution you make to a personal pension gets topped up by 20% tax relief. That means a £100 contribution only costs you £80.

If you’re self-employed and a higher or additional-rate taxpayer, you can claim tax relief at 40% or 45% respectively through your annual tax return.

You can contribute a maximum of £40,000 a year to a personal pension – called your ‘annual allowance’, and can carry forward any unused allowances from the past three tax years. This can be handy for the self-employed, who may receive a larger income irregularly due to the nature of their work and can afford to save more into their pension.

Find out more: personal pensions explained – learn how this type of pension works

Self-invested personal pensions

Self-invested personal pensions (Sipps) are a type of personal pension. Where personal pensions are offered by insurance companies, and may have a limited investment choice, Sipps give you much greater control and greater flexibility to choose where your money is invested.

These pensions are well suited towards those who want to actively manage their pension savings and choose their own investments. They can also be particularly useful if you want to consolidate any other pensions you may have had from other jobs – although you need to watch our for transfer charges or loss of benefits.

And Sipps are handy for those who wish to use income drawdown to fund their retirement. Since the 2015 pension freedoms made this a more realistic option for millions of retirees, Sipps have become far more popular.

Find out more: what is a Sipp? – the pros and cons explained

Lifetime Isa

Introduced in April 2017, Lifetime Isas allow people to claim up to £32,000 in free government cash towards their retirement savings.

Withdrawals can be made tax-free and penalty-free once you turn 60 years old. However, you can only open a lifetime Isa if you’re aged between 18 and 40.

Pensions experts have warned against using a lifetime Isa as an alternative to a pension because of the lack of valuable tax relief. But a lifetime Isa could be considered as part of a wider retirement plan.

Find out more: lifetime Isas – find out if you’re eligible

Tax and the self-employed

Self-employed workers could be able to free up extra money to store in their retirement by ensuring they’re not overpaying tax.

Our guide on tax for the self-employed includes all the tax breaks and allowable expenses you may be entitled to.

The Which? tax calculator also offers jargon-free personalised tax tips to help you submit a self-assessment form without paying more tax than you need to.

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