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Why everyone needs a pension, including the self-employed

By Romi Savova

 The self-employed boom of the last 20 years has seen a significant number of us go out on our own, enjoying the flexibility and freedom that comes with being our own boss. And while there’s never been more self-employed workers in the UK (over 5 million), most will agree on one thing – growing a business can be challenging, particularly if your monthly income varies.

When investing in your business is the priority, and saving for retirement has historically proved tricky due to a dearth of unsuitable products for the self-employed, it’s all too easy to push your pension aside and ignore it. However, this could have disastrous consequences in later life.

According to research from workplace pension scheme NEST, just 24% of self-employed workers are currently saving into a personal pension. This means that around 4 million people are projected to retire without adequate savings, and will likely need to rely on the State Pension which currently pays a maximum of around £750 a month (2020/21)*. Depending on your lifestyle and retirement ambitions, making ends meet on this income could be a real stretch. And while the State Pension is available for most individuals who’ve paid National Insurance Contributions for a minimum of 10 years, it can only be accessed at the age of 66. Self-employed workers without additional income (such as a pension or other savings) may need to continue working for longer than planned.

The situation couldn’t be more different for employed workers who benefit from Auto-Enrolment, which compels employers to contribute at least 3% of their qualifying salary to a workplace pension. Figures from the Institute for Fiscal Studies show that by 2018 nearly 80% of working-age employees were contributing to a pension. As self-employed workers don’t receive this valuable benefit, they’re at a significant disadvantage and the onus is entirely on them to set up and fund their pension.

The benefits of pension saving for the self-employed

 At PensionBee our long-term vision is to live in a world where everyone can look forward to a happy retirement, and this includes the self-employed. But what are the key benefits of pension saving?

Beyond the added security of having additional money set aside, for every £100 you put into your pension, the government tops this up by £25. So the value of your retirement savings immediately increases by 25%. Thanks to compound interest, the sooner you start contributing the more time your pension will have to grow. This means an initially small pension pot has the opportunity to turn into a much larger pot by retirement. If you own a limited company most pensions will allow you to make contributions directly from your business bank account which could be offset against your corporation tax bill.

In addition, personal pensions can also be accessed from your 55th birthday (rising to 57 in 2028), allowing you to take out 25% of your retirement savings as a tax-free lump sum, if you wish. And, unlike most things you might own, such as property, pensions aren’t considered part of your ‘estate’, so if you die before the age of 75, your pension can usually be passed to your beneficiaries as a lump sum without any tax deductions.

There are a few flexible self-employed pension options to choose from, and one of these is PensionBee’s new-self employed pension, which has been designed to make saving as easy as possible. There are no minimum contribution amounts and payments can be made on an adhoc basis, whenever your income allows.

Whether you have previous workplace pensions you’d like to consolidate or have never saved a penny towards your retirement before, you can start a new self-employed pension with PensionBee. It’s free to sign up  and the process takes less than five minutes so you can get back to doing what you do best – running your business!

Romi Savova is CEO at leading online pension provider PensionBee.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

*Rising to around £770 in 2021/22, from 12 April

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