For employees it can be fairly simple to address the pension situation. In most cases your employer will be deducting from your paycheque to pay into a pension scheme on your behalf, and you may or may not have the option to ‘salary sacrifice’ more of your pay into the scheme. This in turn may or may not be a sensible tactic, depending upon your specific situation.
But for freelancers, business owners, directors, and contractors the situation is very different. Working for yourself provides a lot more control over how and how much you’re paid, and this in turn opens up many different strategies.
For those who work to live, the goal might be to keep workload low and simply ensure you’re paid enough each year to be comfortable, or it might be to build your business as strongly as you can with the goal of hitting a threshold where you can sell off or wind up the business and live on previous earnings.
In either case, your financial planning needs to take pensions into account.
So what extra considerations does self-assessment bring up for pensions?
Tax Deductible Pension Contributions
One of the reasons that salary sacrifice is a popular model for higher-earning salaried individuals is that it can reduce your tax obligations for the year while setting aside finances for your retirement. Typically, your basic-rate tax relief on personal pension contributions will be 20%.
You’ll find a section in your self-assessment tax return titled ‘Payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider’. Your gross pension contributions should be marked down there.
It’s often said that you should maximise tax efficiencies by increasing your pension contributions. As responsible financial advisors, we don’t think this should be blanket advice.
The balance between tax deductions and ensuring your own personal liquidity will be different for everyone, and finding the right balance is something that calls for specific advice and careful decisions based on your income, your expected outgoings, and whether you’re planning on any other significant investments.
What Purpose Does Your Pension Serve?
Pensions aren’t the equivalent to a long-term savings account. How much you invest in your pension is going to reflect your planning for the future – and that will depend on both your goals and your current circumstances.
There are multiple different ways to set up a pension scheme when self-employed, but broadly they break down into three categories.
Personal Pension Plans (PPP) allow for regular or one-off contributions depending on your preferences. They are the most common solution.
Self-Invested Personal Pensions (SIPP) give you greater flexibility and control over what your pension funds are invested in. Popular with those whose ethics drive their investing, they can be a great tool but require more effort and attention on your part.
Lastly, there’s the National Employment Savings Trust, a government-backed scheme designed to be low cost and easy to set up.
Which one works best for you will depend on your goals, your revenue, and how much attention you want to spend.
Planning for the Future
Like it or not, there’s a huge component of financial prediction involved in your future plans. That includes looking at likely changes in the economy and shifts to financial regulations which may affect the real value of your pension scheme when released.
We’re here to help you get your thoughts in order and get a sense of the real numbers called for in your pensions (and other investments) to achieve your goals. If you’d like to start the process, get in touch today.
