Self-employed? A SIPP could still be worth considering

Pension reforms may not have helped people who work for themselves, but there are still some positives.

Self-employed? A SIPP could still be worth considering



Figures from the Pensions Commission - set up by the government to examine retirement planning among the UK population - show that only 4% of people who are fully self-employed currently pay into a private pension.

Self-employed workers fall outside auto-enrolment. Employers must offer staff a pension and enroll them unless they opt out, but the self-employed receive no employer contributions - the benefit enjoyed by members of occupational schemes.

Self-employed people often lack the money to pay into a pension consistently. While building a business, they may have little cash left over, and their income can arrive unevenly and without much warning.

You may not receive a contribution from your employer, but the government still adds to your savings through tax relief at your highest marginal income-tax rate. A 1,000 contribution would therefore cost a basic-rate taxpayer 800, a higher-rate taxpayer 600, or an additional-rate taxpayer 550.

To qualify for that tax relief, you'll need an approved pension plan. For many self-employed people, a self-invested personal pension (SIPP) opened through an online investment platform can work well. The payments do not have to be fixed each month, which helps when income varies, although regular contributions remain a sound financial habit. You can also pay in occasional lump sums when money is available - for example, after a stronger-earning period or payment for a well-paid contract or project.

What self-employed savers need to consider

If you work for yourself, check the annual allowance before paying into your pension. In a tax year, you can contribute up to 100% of your income, subject to a maximum of 60,000 if your income exceeds that figure.

There is some flexibility here: in the current tax year, you can use unused annual allowance from the previous three tax years under the carry-forward rules. That can help self-employed savers whose income changes sharply from one year to the next.

Self-employed savers who operate through a limited company instead of as sole traders could pay an employer pension contribution through the business. The payment adds to their pension while reducing company profits before corporation tax is calculated, which lowers the tax bill. No employers' National Insurance is due on remuneration paid this way.

Finally, designated pension plans are not your only option for later-life savings. Individual savings accounts (ISAs), for example, can provide tax-efficient saving while allowing you to withdraw funds more freely when necessary. That flexibility may reassure self-employed workers who worry about needing access to their money, though anything withdrawn now will not be available in retirement.