Why should I start saving into a pension?

Date: 6th July 2020  |  Author: Sean Toomer

I’m self-employed what benefit is a pension for me? Being self-employed it is more difficult to start the habit of saving into a pension than employed people. You have no-one to choose the pension scheme, no employer contributions and your income can be quite irregular to begin with. But you should start thinking about saving for your retirement and the quicker you do the better.

Making the most out of your pension pot

The earlier you start and the longer you save into your pension the less you have to pay in. It obviously will give you more time to contribute into your pension before your retirement age. Which you will then benefit from tax relief and more time for your savings to grow.

Believe it or not starting early could more than double your pension pot!

*Assuming savings grew at 5% a year and charges were 0.75% a year

You pay  Government pays   Start saving age   Pension pot (65)

£100               £25                          30                         £70,000

£100               £25                          40                         £46,000

£100               £25                          50                         £25,000

*The above table has been taken from moneyadviceservice.org.uk

Irregular income

Do not worry that your income will vary or about committing to a fixed monthly pension contribution. Modern pensions are fully flexible and will allow you to stop, start and change the level of payments to suit you. You can start the regular contributions from as low as £50 per month and then top up on an ad hoc basis when your profits and position allow.

Tax

It is also worth remembering that you will receive tax relief on your contributions. You can contribute whatever you want to into a UK registered pension BUT tax relief is only received up to a certain amount. There is an Annual Allowance of £40,000 per annum but usually you can only contribute that amount if you have earnings of £40,000 or more. If you take income in the form of dividends from your own company these don’t count as earnings for the purposes of receiving tax relief, but the good news is that you can contribute from your business (if you are a LTD co.) as an employer instead and that contribution will be tax deductible for your company. Employer contributions also save you income tax and National Insurance.

Tax relief on contributions to a pension scheme is received at source at the basic rate of 20%. You can claim any higher tax relief through your end of year tax assessment. If you are paying employer contributions into your pension these will not attract further tax relief, but as already stated your employer contributions will reduce your corporation tax bill.

Carry forward

Once you have been a member of a registered pension for three years you are able to benefit from Carry Forward to increase the amount that you pay into your pension. This could allow you or your company to contribute more than £40,000 in any one tax year by using allowance from the past three tax years, if not previously used.

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