PensionBee won Best Pension Platform – Large Portfolio – at the YourMoney.com Investment Awards 2024. This was the first time it submitted a nomination.
As part of YourMoney.com‘s special award winner spotlight series, Becky O’Connor, director of public affairs at PensionBee, shares five expert tips to help the nation’s army of self-employed workers maximise their pension contributions.
How self-employed workers can maximise pension contributions
Navigating financial management when self-employed often requires more thought and planning than those in traditional employment.
Pensions, in particular, can be complex without the benefits of auto-enrolment or employer contributions and managing a fluctuating income.
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However, despite this unique set of challenges, building up a robust pension pot for later life is achievable. Here are my top five tips to help maximise your pension and increase your retirement confidence.
1) Consider a pension specially designed for the self-employed
Many self-employed people opt for personal pensions, but specific self-employed schemes are becoming increasingly available. In these tailored schemes, you can either start a brand-new pension and/or consolidate existing ones.
The latter is particularly important if you’ve had previous jobs before becoming self-employed, as old, scattered pensions can be easily lost. PensionBee research estimates that almost one in 10 workers believe they have lost a pension pot worth more than £10,000 and around 4.8 million pots are already missing in the UK.
Self-employed pensions typically allow flexible contributions according to your current income, free from minimum contribution amounts. This flexibility can be invaluable, ensuring consistent contributions without putting undue strain on finances during leaner months.
Selecting the right provider is critical; look for one with a diverse range of investment options, low fees and strong customer support. Conduct thorough research and comparisons to make an informed choice when selecting a provider.
2) Make pension contributions a monthly habit
Monthly income can fluctuate when self-employed, but it’s important to prioritise making regular contributions. Setting up automatic contributions helps solidify this habit, ensuring you remain on track with your goals.
Utilising online tools and calculators can help visualise how monthly contributions accumulate over the years, set achievable targets, and determine the amount required for a comfortable retirement based on personal aspirations.
Regular contributions, even if modest, benefit from compound interest and investment growth over time, leading to long-term gains. The earlier contributions start, the more time your money has to grow, significantly increasing the size of your pension pot by retirement.
Regularly review and adjust your contributions as your income grows or if you receive a windfall, such as a bonus or inheritance, consider adding some of that money into your pension.
3) Make the most of the carry-forward allowance
The carry-forward rule utilises any unused annual pension allowance from the previous three tax years. This can be particularly beneficial if your income – and thus the capacity to save – varies significantly from year to year.
If you have a particularly profitable year, you can contribute more than the annual allowance (currently £60,000 since the 2023/24 tax year) by using unused allowances from the previous three years, up to a maximum of £180,000 including the current year’s allowance.
To effectively utilise carry forward, detailed records of pension contributions must be kept and unused allowances calculated. It’s important to note that you must have been a member of a pension scheme during the years being carried forward, even if no contributions were made in those years.
4) Make the most of tax breaks
If you’re self-employed and the director of a limited company, using the company to pay employer contributions into your pension can be advantageous. Pension contributions generally count as an allowable business expense, which means they can reduce the corporation tax bill.
The company also won’t pay National Insurance on these pension contributions, leading to additional savings when money is paid from the company into your pension. This can be a considerable benefit, especially when making substantial contributions.
Another positive to bear in mind is that pension contributions come from your pre-tax income. This means that by making pension contributions, you could see a reduction in your personal tax bill, allowing for more take-home income.
5) Leverage National Insurance contributions (NICs)
Maximising your pension contributions also involves managing your NICs. As a self-employed individual, you must pay Class 2 and Class 4 NICs. Ensuring the requirements for full NICs each year are met is crucial for securing your state pension entitlement.
To receive the full state pension, currently set at £11,502.40 per year (2024/25), you need 35 qualifying years of NICs, and at least 10 qualifying years are required for a partial state pension.
If you have gaps in your NIC record, consider making voluntary Class 3 contributions to fill those gaps. This ensures you qualify for the maximum state pension, which can provide a significant boost to your retirement income.
However, it’s important to remember that the state pension alone is unlikely to sustain you in retirement, so this should be viewed as a helpful safety net but not solely relied upon.
Securing a healthy pension as a self-employed individual might seem daunting, but with careful planning and strategic contributions, it’s entirely achievable.
Remember, the key to success is starting early and staying consistent with contributions. Your future self will thank you.
Becky O’Connor is director of public affairs at PensionBee
PensionBee holds over £5bn in assets on behalf of more than 250,000 customers. Founded in 2014, it aspires to make as many people as possible pension confident so that everyone can enjoy a happy retirement.
Related: The winners of the YourMoney.com Investment Awards 2024
