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Money Mailbag: How do I contribute to a pension now I’m self-employed?

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Dear, I have recently become self-employed. I would like to continue saving into a pension. What are my options? John, Huddersfield

Figures suggest only one in ten self-employed workers contributed to a personal pension in the 2013/14 tax year.

This is particularly worrying as the number of people registered as working for themselves in the UK soared from 3.3 million in 2001/02 to 4.6 million in 2013/14.

So, while people enjoy the freedom and flexibility of being self-employed, they could be putting their financial future at risk.

The important point to remember is whether you’re employed or self-employed, you’re still able to make pension contributions and receive tax relief on them.

Gary Smith of wealth manager Tilney Bestinvest gives the following example: “If you contribute £80 per month into your pension and you’re a basic rate taxpayer, then £100 will be applied to your policy as you qualify for basic rate tax relief at source. If you’re subject to higher rate tax, you will be able to claim any higher rate tax relief via your self-assessment form.”

Which plan?

When you’re deciding on the best pension plan, two things to think about are flexibility and cost.

Steve Patterson, managing director at Intelligent Pensions, says: “Many personal pension plans nowadays are available with minimal set up charges and contributions can be invested into low cost ‘tracker’ funds keeping the overall charge to below 1% p.a. of the plan value.

“It’s worth taking professional advice on the plan selection. There’s normally no restriction on varying the amount you pay in whether that’s on a regular monthly basis or ad hoc single contributions, although there will usually be a minimum amount required. Bear in mind that you can’t access any of the money until you’re aged 55, so it will be locked away for a period unless you’re over that age already.”

When your pension pot reaches £20,000, Patterson suggests switching to a range of funds within your existing plan.

“More expensive options such as self-invested personal pensions (SIPPs) are generally not worth considering until your fund is much larger, but most ordinary personal pensions will offer a range of funds. Again it’s worth taking advice,” he says.

Setting up a business?

An important point to bear in mind is that if you’re setting up your own business and you take on even one employee, they will need to be auto enrolled into a qualifying auto enrolment scheme.

Patterson says: “For simplicity and convenience NEST would be a good option. That’s the government-sponsored auto enrolment scheme that was specifically set up to cater for very small employers.”

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