INDEPENDENT FINANCIAL ADVISER

Independent Financial Adviser

Independent Financial Adviser

Part A

Pension planning for the self-employed

A pension gives you a retirement income, paid for by investments built up during your working life. The state pension is funded by your National Insurance contributions but only provides a basic income. You may need another pension in order to retire comfortably.

If you are self-employed, you will not qualify for the additional state pension (also known as the state second pension). However, you can take out a private pension such as a personal pension or a stakeholder pension. The amount you get at retirement depends upon how much money has been paid in, how well it has been invested and the age at which you retire.

It is important that you consider all your options before making a decision. This guide helps explain how pensions work and what you need to do to find one that suits your needs.

A personal pension plan is an investment policy for retirement, designed to offer a lump sum and income in retirement. It is available to any United Kingdom resident who is under 75 years of age and can be bought from insurance companies, high street banks, investment firms and some retailers (i.e. supermarkets and high street shops). They are money purchase arrangements. This means that a member contributes to the plan, the money is invested and a fund is built up. The amount of pension payable when the member retires is dependent upon: (Boylan, A. and Burchardt, T. 2002, 34-67)

the amount of money paid into the scheme;

how well the investment funds perform; and

the 'annuity rate' at the date of retirement. An annuity rate is the factor used to convert the 'pot of money' into a pension.

Unlike the many who are helped by an employer contribution, this group is entirely reliant on their own resources for making plans to save for their retirement. Not only that but the self-employed have less access to state pension provision. There is encouragement from the government for people to become self-employed and at first it seems attractive, especially if you have recently become unemployed or redundant. Although one of the main attractions of becoming self-employed is no longer having to work for somebody else there are several disadvantages you should consider. These include not being certain of having a regular income, having to arrange your own sick pay and pension and probably having to work long hours. Everyone who lives in the UK on a day to day basis is entitled to a basic personal tax allowance. You may also be entitled to other allowances on top of the basic allowance. This means that some of your income, which would otherwise be taxable, will be tax-free.

Tax allowances are announced in the Budget each year. If you are an employee and so are taxed under Pay As You Earn (PAYE), your personal allowance(s) will be spread throughout the year, so that each week or month you will have a certain amount of tax-free income and ...