1. Make the most of ‘carry forward’ if you can
Most people can pay up to £40,000 into a pension, known as the ‘annual allowance’ (including basic rate tax relief, this is £32,000 of your contributions).
When you’re self-employed, there may be some years when you can’t pay much into your retirement pot – when you need to invest in your business, for example. If you leave a little (or a lot) of your annual allowance unused, however, ‘carry forward’ could help.
In any tax year, you can make use of your unused annual allowance from the three previous tax years – provided you were a member of a pension plan at that time. That means you could benefit from an annual allowance of up to £160,000 (if you had earnings to this level) using carry forward, including tax relief worth up to £32,000.
In any tax year, you can make use of your unused annual allowance from the three previous tax years.
One important point to note here is if you have flexibly accessed your pension already, you will be restricted by the money purchase annual allowance.
This lowers your annual allowance from £40,000 to £4,000 and also removes the ability to carry forward unused allowances.
2. Lower your tax bill by paying profits into a pension
If you own a business you might also want to consider paying part of your salary directly into your pension as a company contribution.
The benefit of doing this is the pension contribution would no longer count as profit, meaning you can potentially reduce both your income tax and corporate tax bills in one fell swoop.
3. It’s not just about pensions…
If you’re aged 18 to 39, self-employed and a basic-rate taxpayer, the Lifetime Isa could offer an attractive alternative to a pension.
You can pay up to £4,000 a year into a Lifetime Isa and this will be automatically topped up by 25 per cent – identical to the upfront bonus Sipp investors get via pension tax relief. You can keep contributing and receiving the 25 per cent bonus up until your 50th birthday.
You can then withdraw the money tax free from age 60, if you use the money towards a first home worth £450,000 or less, or if you become terminally ill.
If you access the money in 2020/21 for any other reason you will face a 20 per cent Government-imposed penalty, while from 2021/22 this is due to revert back to 25 per cent – meaning you might get back less than you originally contributed.
By comparison, up to 25 per cent of money saved in a pension is available tax free from age 55, with the rest taxed in the same way as income.
4. Save early and often, keeping your costs as low as possible
The best ways to achieve the retirement you want are also arguably the simplest. When it comes to building a decent-sized pension pot, saving early and often – taking advantage of the tax relief available and allowing compound growth to work its magic – can make the whole process a lot easier.
Conversely, if you delay then you will need to make bigger contributions to make up for lost time.
Alongside how much we pay into pensions and how we invest, the charges we pay are the final key component in determining how much we end up with in retirement. In fact, even reducing your charges by 0.5 per cent a year could add thousands of pounds to the value of your pension.
5. Think about combining any old pensions you have
Modern pension investment platforms are easy to use and offer a wide range of investments to suit your needs and risk appetite
Millions of people including those who are now self-employed have built up pensions over the course of their lives – for example from an old employer scheme – which they have now lost track of.
Locating these old pensions and combining them with a single provider can deliver a number of practical benefits, including:
Reducing your charges by 0.5 per cent a year could add thousands of pounds to the value of your pension.
· It’s easier to manage all your pensions in one place
· You could lower your charges – particularly if you have an older-style pension
· Modern platforms are easy to use and offer a wide range of investments to suit your needs and risk appetite
Before transferring any older pensions you might have, it’s worth checking the terms as some come with valuable guarantees attached which could be lost.
Others may also have exit penalties which could erode the value of your pension if you leave before a set retirement age.