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Pensions for the Self Employed

By: Garry Crystal - Updated: 13 Oct 2012 | comments*Discuss
Pension Self Employed Personal

If you run any kind of a business it may be tempting to disregard a pension plan and look on your business as your pension. This is a risky way to view your retirement plans as businesses fail as well as succeed. You may fall ill and have to sell or close your business early or you may not be able to find a buyer for your business. If you do want to err on the side of caution with regards to your pension plans then there are some options open to the business owner.

Personal Pension Plans

Just like any other member of the public, a self employed person can open a personal pension plan. These are purchased from banks, insurance companies, some retailers, and investment companies; you can even go online and buy a personal pension plan. These plans are available to anyone under the age of 75 who is a UK resident.

The amount a self employed person pays into a personal pension plan is based on age and earnings. But remember, timing is very important for the self employed. It may be a while after your business year has finished before you can find out how much profit you have made which will govern how much you can pay in to the pension.

How Personal Pension Plans Work

With personal pension plans you contribute money to the plan, the money is then invested and your pension fund builds up. When you retire the money you receive will be dependant on the performance of the investments, how much money you have paid in and how long you have been paying in for. The fund will also be determined by annuity rates; this is the rate used to change the money into a pension. At present you can retire between the ages of 50 and 75 although this timescale is set to change in April 2010. When you retire it is possible to take a 25% lump sum from your pension fund.

Self Invested Personal Pension

Self invested personal pensions (SIPPS) are considered to be the most flexible pensions available and is another type of personal pension plan. With SIPPS you have the choice over your investments or you can have an advisor choose the investments for you. SIPPS give tax relief of 22% and if you are a higher investor you can receive an additional 18% tax relief. You can withdraw a lump sum when you reach the age of 50 and there are a variety of investment options including property.

The downside of SIPPS is that there may be a sizeable chunk of your money going towards the set-up fee and annual fees. It is also a risk; investments can go down as well as up. If you simply want a basic pension plan that you can pay into and then forget about until retirement then a SIPP may not be right for you.

Stakeholder Pensions

Stakeholder pensions for the self employed are similar to personal pension plans in that you pay money into a fund that is designed to pay a lump sum and income during retirement. There are guidelines set out by the government and these include no penalties or charges if you wish to stop, restart, increase, or decrease contributions.

There is no penalty if you wish to transfer your stakeholder pension to another pension fund and the minimum contribution is only £20. The charging design of the stakeholder pension is capped at 1.5% for the first ten years and 1% for the remaining years.

State Pensions for the Self Employed

State pensions for the self employed are governed by national insurance contributions. The self employed must pay flat rate class 2 national insurance contributions for every week that they are self employed. At the moment these contributions are £2.20 per week. You may be exempt from these contributions if you are showing a low profit of less than £4635, this is known as a Small Earning Exemption. This exemption is not automatic and needs to be claimed from HM Revenue and Customs.

If your profits are over the standard low profit earnings then you will need to pay Class 4 national insurance contributions. At the moment the low standard is set at £5225 per year. Class 4 currently works out at 8% of your profits between the lower limit and an upper profit limit. Anything over the upper profit limit will pay an extra 1%. These contributions will earn you the same basic state benefits as employed people.

Pensions for the self employed are similar to pensions for people who work for an employer. However, you should always consult your accountant or tax advisor on your yearly profits before deciding to proceed with any type of pension plan. There are many areas in which a good accountant can make the most of your tax contributions and tax relief benefits.

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