Would you LOVE to take better care of your finances?

Sign up for the Self Care For Your Biz Finances Retreat. It's completely free.

Join over 300 women like you who said yes.

Retirement Planning For Sole Traders

Being a sole trader can be a great path for those who want to be their own boss and wish to dictate the creative direction of their career. This relative freedom does come with a trade-off, however, as you take on more liability and can only rely on yourself to have a comfortable retirement. Without an employer to provide contributions for your pension plan, being able to rest on your laurels in your retirement will be solely dependent on whether or not you’ve got the funds to stop working.

Right now, only 24% of self-employed individuals in the UK are actively saving for a pension plan. Aside from keeping emergency money, it’s important to have a good pension plan for yourself so that you can afford to retire comfortably. As a self-employed individual, you’re entitled to the state pension but this can only cover the very basic expenses. The flat rate for 2020/2021 is £175.18 per week or £9,109 per year. Though it can be a huge help, it might not be enough to cover your daily expenses in retirement. Since sole traders have different options from employees and those who own a limited company, one should look to pick the route that works best for them.

Self-Invested Personal Pension (SIPP)

This takes some learning to get into, since you will essentially be managing this pension by yourself. Though it requires some experience, it also comes with more control and choice. It works much like a standard personal pension, but with more flexibility in what you can invest in. As with any endeavour that is meant for the long-term, going for SIPP means taking more time and effort in exchange for results that you can manoeuvre better.

The tax benefits of a SIPP resemble those of other private pensions. The government pays the pension holder an extra 20% of tax relief for basic-rate payment, and you can add money to your pension in the timeframe you prefer. The higher your tax payments are, the more you’ll get with your tax return. On top of that, you can grow the money in your SIPP free from income tax and capital gains. This option is good for those who are comfortable making hands-on choices when it comes to their investments.

National Employment Savings Trust (NEST)

This option is arguably less hands-on since the NEST is a provider that basically manages your pension. It provides you with some plans to choose from, so the amount of risk is dependent on your own preference. Overall, however, it’s relatively low-risk in terms of pension schemes. However, it also comes with lower returns.

Since many workplaces also use NEST pensions, you would be able to combine any account you already have from your old employment into your new self-employed one, and vice versa. All contributions stay in your pot until the retirement date of your choice. For tax relief, NEST automatically claims this from your account after every contribution. If you exceed your lifetime allowance (or in some cases, your annual allowance), then you will also be charged an additional tax.

Stakeholder Pensions

This pension plan is geared toward those who want to make smaller contributions. The trade-off for the affordability is a less diverse range of investment choices. That said, it’s still a good option for those who want accessibility and low cost. It also happens to be quite hands-off.

According to data from Her Majesty’s Revenue and Customs, most individual contributions in stakeholder pensions actually come from employees sponsored by their workplaces. This is because this scheme already has a default strategy and flexible minimum contributions. You don’t actually have to be retired to get the benefits from your stakeholder pension, though. If you take this on as a sole trader, your tax relief will be based on your annual allowance and whether you pay your taxes above the minimum percentage.

Though the final choice really depends on preference, some good pointers to keep in mind are flexibility, convenience, and your ability to manage and regularly contribute to its funding.

This post is contributed by William Moss.

Can I Help?

Book a conversation with me, if you are looking for a safe space and the support you need to sort out your business money (but not pensions, because I’m not allowed to do that #rules).

We’ll explore how you feel, what’s working, what’s not working and how I can help, so you can feel calm, confident, organised and on top of things.

Book your conversation (at no charge)

To your financial self-care

Rosie x

FREE INTRO CHAT

Start your business, help you do your sole trader tax return, expenses, explaining limited companies.

What do you need?

To get started,  book a free introductory chat.

Book my intro chat