Self-employed and pensions

Three quarters of self-employed people are not contributing to a pension at the moment, a survey by an investment platform has found. And half of self-employed people have never even started a pension scheme. The figures emerged from a survey of around 9,000 workers by Interactive Investor.

Most employees are now saving into a pension following the introduction of auto-enrolment but self-employed people are not covered. There are many benefits to paying into a pension and the earlier you start, the less you have to put away each month to build up a sizable fund.

• Tax relief is given on pension contributions of up to £60,000 a year. For every £100 you pay in, HMRC will add £25. If you are a 40% taxpayer, you can in addition claim £25 against your own tax bill. An additional rate taxpayer will get £31.25. Scottish taxpayers may receive slightly more relief because tax rates on earned income are higher.
• Your fund will be broadly free of tax on its investment income and capital gains.
• When you take the benefits, up to a quarter of the fund is normally tax free, although the pension income will be taxable.
• You can draw your funds flexibly from age 55 (rising to 57 in 2028).
• There is no longer any limit to the amount you can hold in a tax-favoured pension scheme without triggering a tax charge. However all tax-free lump sums, including death benefits, are tested against a lifetime limit, currently £1,073,100.

The combination of tax relief on contributions, tax-free growth within the fund and the ability to take a tax-free lump sum on retirement makes a pension plan an attractive and important savings vehicle to factor into self-employed finances. However, there may be benefits in supplementing a pension plan with an individual savings account (ISA) or other investments where possible.