One of the benefits of being your own boss is setting your own hours, picking your ideal workload, choosing who your clients are and having more flexibility to negotiate your wages. However, a major drawback in the life of the self-employed is having to pay for your own benefits, including healthcare, dental and the ever-important pension.
Sure, you’re making decent money to make ends meet, and perhaps even a little extra for investments. But are you certain that you’re getting the highest possible return for your earnings as you plan for the future?
No one wants to work forever, prompting many of us to find job security that will set us up for retirement. If you’re not fully employed by a company, consider seeking out a pension plan that is reliable, suits your needs and offers a high yield rate. Because of the complexity of pensions and associated portfolio management issues, you may want to consult with an investment counsellor for guidance.
What type of pension to use?
A personal pension is the best way to go for self-employed entrepreneurs, who now make up 15% (4.81 million workers) of the entire workforce, according to the Office for National Statistics. There are three main kinds of personal pensions, one of which is an ordinary one that you can find with most major providers.
Another type is the stakeholder pension, which is among the most popular ones for the self-employed due to their high-yield potential and flat rates. With this plan, you invest in a financial services provider that ranges from banks, insurance companies and building societies (also known as ‘providers’).
The maximum charge for stakeholder pensions is 1.5%, and the value of your retirement benefits is determined by the amount of contributions you’ve made, the period over which you’ve invested, investment growth over this period and the level of charges.
Self-invested personal pensions (SIPPs) can be quite beneficial as well, which offer more flexibility for entrepreneurs seeking a variety of investments to choose from.
However, SIPPs often charge higher rates in exchange for allowing you to further diversify your portfolio. A less valuable but stable pension scheme is Nest, the government-backed plan, which usually charges a 0.5% fee for most workers. However, your investing options are quite limited with Nest as you can only choose from five plans.
How much can you save?
Another benefit offered by pensions come in the form of tax breaks depending on how much you contribute to your plan. If you’re on the median pay scale, investing £100 into your pension will prompt the government to add an extra £25 to your scheme. Higher-rate taxpayers can receive an extra £25 for every £100 they pay in their tax returns.
There is a limit to how much you can contribute a year while still garnering tax breaks, with the cap set at £40,000. This past year, the lifetime pension limit was reduced from £1.25 million to £1 million. High earners should also know that earning over £150,000 will see their annual pension allowance gradually reduced once they earn £210,000 or more.
What investment alternatives are there?
Many workers forget the benefits they and their family can reap if something unforeseen happens.
Investing in life insurance is one way to help out your family if something happens to you, but there is also income protection, which can be paid out to you if you become too ill to work. With this plan, you will have to shell out £50 a month in exchange for a £2,500 monthly income that is paid out for two years if you do fall ill.