Automatic Enrolment may work for the employed but where does this leave the self-employed?
Around 5 million people in the UK are working for themselves – this makes up 15% of the UK workforce. Around one in three of these people say they cannot afford to save into pensions privately, so they will rely on the state pension to fund their retirement.
You will only qualify for the state pension if you pay your national insurance contributions for 10 years, and to reach full entitlement you must pay national insurance contributions for 35 years. So, the maximum you will receive is £8,546 a year, and you may have to wait until age 68 to receive it!
You may be saving for your retirement through other means outside of pensions, but you could be missing out on valuable tax breaks by saving this way.
We understand that saving for retirement is difficult for the self employed because they are not automatically enrolled into a pension scheme by an employer, and any contribution made comes from own earned profits, rather than receiving an employer contribution. In addition, because income varies, the main priority each month is to ensure there is enough regular income to pay the bills, rather than putting this into a pension plan where access is limited before age 55.
It is worth considering the advantages of saving into pensions, as follows:
- Income tax relief on contributions up to the highest marginal rate
- No capital gains tax
- No inheritance tax
- 25% of the fund value is free from tax after age 55
- On death of the policyholder before age 75, the fund is paid to a beneficiary free from tax
There have been many changes to pension legislation over the years, so now could be a good opportunity to take advantages of these tax benefits. For example, for every £1 added to your pension you receive basic rate tax relief at source, so the cost to you would be 80p. If you are a higher or additional rate tax payer you will receive additional tax relief through your self-assessment tax return. But please be aware, the Government could decide to introduce a flat rate of tax relief on pensions or even remove other valuable tax benefits in the future. So liaise with your financial adviser and start saving as soon as possible.
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This material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation. Kreston Reeves Financial Planning Limited (Registered in England and Wales, registered office: 37 St Margaret’s Street, Canterbury CT1 2TU, number 3852054) are authorised and regulated by the Financial Conduct Authority.
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