3 ways to rebuild Self-employed pension after COVID


After Covid, employers unlikely to spring for auto-enrolment

Coronavirus has not affected everyone’s finances equally. More wealthy households have been able to save an astonishing £125bn during lockdowns, according to the Bank of England, while the poorest have seen incomes tumble and costs soar amid calls for the £20 Universal Credit increase to be made permanent.

The self-employed are an example of these extremes; with some businesses able to take advantage of pandemic trends like video sessions on cake making to origami and the demand for subscription boxes, have thrived. But many smaller firms are reliant on face-to-face interactions for business and have disproportionately suffered, showing up now in the finances of their owners.

More than 50% of all self-employed pension savers – around 1 million people – have paused or reduced pension contributions due to the pandemic, according to new research by Unbiased, a web directory of financial advisers. Typically this is down to a loss of income.

Only 49% of the self-employed have any form of pension at all, it found, and most expect to work beyond age 66. The typical self-employed pension contribution was 4.1% – compared to 8% of qualifying earnings for employees who are auto-enrolled into workplace pension schemes. Overall Unbiased found around 80% of the self-employed are putting their retirement incomes in jeopardy either by reducing their rate of pension saving, or by not saving into pensions at all.

Often entrepreneurs fall back on the old adage ‘my business is my pension’ or ‘my house is my pension’ – but this really is putting all your eggs in one basket. The risk is you’re left relying on your State Pension, which in 2020/21 pays up to just £175.20 per week (rising to £179.60 in 2021/22).

A huge problem for the self-employed trying to save is their income, is it tends to go up and down a lot which can make regular contributions of a fixed amount difficult – but there are easy ways around this.

How do I save into a pension when self-employed?

  1. Save into a SIPP

Saving into self-invested personal pension (SIPP), with contributions usually benefitting from basic-rate tax relief up front, is a good option. Higher or additional-rate taxpayers can claim back additional tax relief from HMRC as well. SIPP costs can vary. Choosing a simple, low-cost SIPP allows you to keep more of your pot for retirement.

  1. Open a Lifetime ISA

Anyone aged between 18-39 can start a Lifetime ISA to save up to £4,000 a year and the Government will top it up by 25% (the same as basic-rate pension tax relief) up to a maximum of £1,000. Access your money tax-free after your 60th birthday, or earlier for a deposit for a first home worth £450,000 or less. Unlike a pension, early withdrawals for different reasons are possible, but you’ll be hit with a penalty on the money you take out. This is 20% for 2020/21 and increases to 25% for 2021/22.

  1. Set up a self-employed pension

Savers can pay in in line with their current income, with no minimum saving amounts. One-off or regular contributions via bank transfer or direct debit can be easily set up online or via an app, and made from personal or business bank accounts, as a sole trader or a limited company respectively.

Risk warning: Your capital is at risk, as always with investments. The value of the 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 and you should always seek professional pension advice.

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