What’s the best pension scheme for me?
One of our experts answers a reader's question.
9th July 2020 16:16
by Patrick Connolly from interactive investor
Q
“I have been reading up on pensions and investments in Moneywise since becoming self-employed and need advice.
As a self-employed person, my income fluctuates from month to month, and it will change from year to year, so contributing the same amount on a monthly basis is not ideal.
Are there any pension schemes designed for self-employed people, or are we better to invest it elsewhere? And what percentage of income would you suggest a self-employed person contributes to a pension scheme?
”
From: AM/Edinburgh
A
For most people it is important to invest in a pension as they provide compelling tax benefits, including tax relief at your marginal rate on your contributions, tax-free growth, and the option of taking 25% of your fund tax-free when you take benefits.
However, self-employed people such as yourself are at a disadvantage when it comes to pensions as you will not benefit from auto-enrolment or have an employer who is paying into a pension on your behalf. You have to take full responsibility to make sure that you are planning adequately for your retirement.
The basic principles of investing in a pension are the same for self-employed and employed people. This means starting to save into a pension as early as possible, even if you cannot afford to save very much to start with, as it is better to do something than nothing at all.
Many self-employed people need to keep their finances flexible and are wary of locking away money where they are unable to access it. This is a particular concern for those who have varying levels of income and need to ensure they have enough put aside to meet their daily living costs, business expenses and tax bills.
This could mean you may prefer to save money in accessible cash savings or Isas, rather than in pensions. However, having your money accessible means you are more likely to spend it and it won’t be there when you reach retirement.
There is no set amount that you should be saving into a pension, although you could aim for a figure of around 10% or more of your income. You need to be disciplined. You should look at making annual payments into a pension from the money you have saved over the course of the year and aim to increase the amount you pay regularly into your pension when you are more confident about the security of your earnings.
The good news is that most modern pension policies are flexible, allowing you to increase and decrease, stop or start your contributions, or add ad-hoc amounts with no penalties.
It is important you get this right, so if you are not sure what to do, you should take independent financial advice. Contact Unbiased.co.uk for a list of independent financial advisers in your area.
Patrick Connolly is a certified financial planner at Chase de Vere.
This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
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