Saving for retirement when you’re self-employed or working as a freelancer can be challenging. Unlike regular workers, you’re generally not entitled to a workplace pension when you’re working for yourself so, ultimately, saving for retirement and building up a pension pot is up to you.
However, if you are self-employed or freelancing, there are several tax-efficient strategies that could help you build up your retirement savings more effectively. Here’s a look at two such strategies that could be worth considering if you’re working for yourself and not entitled to a workplace pension.
SIPP tax relief
If you’re responsible for your own retirement savings, a sensible move is to open up a SIPP (Self-Invested Personal Pension).
This is a government-approved personal pension scheme which allows individuals to make their own investment decisions from a full range of investments including stocks, mutual funds, and exchange-traded funds (ETFs).
SIPPs have a number of advantages. Not only do they enable you to manage your own money and take advantage of compelling investment opportunities when they arise, but they also offer tax relief, which essentially means more money for you.
If you run your own limited company, you can make contributions into your SIPP through that company, and these contributions will be tax deductible, reducing your tax bill. This could potentially save you thousands in tax.
Alternatively, you could contribute to your SIPP from post-taxed income, and claim tax relief. The tax relief you can claim on your SIPP contributions will depend on how much you contribute and the level of income tax you pay. For basic rate taxpayers, contributions are topped up by 20%, meaning a £1,000 contribution will only cost you £800. Higher-rate taxpayers could enjoy even higher levels of tax relief.
Money in a SIPP can be accessed from age 55 and you can take 25% of your total SIPP balance as a tax-free payment.
Lifetime ISA bonuses
Another option to consider if you’re working for yourself and aged 18-40 is the Lifetime ISA.
With this investment product, any contributions you make into it, up to the annual allowance of £4,000, will be topped up by 25% by the government. In other words, if you contribute £4,000, you’ll receive a bonus £1,000. If you’re not receiving an employer pension, that kind of bonus could really come in handy.
The Lifetime ISA is a little more inflexible than the standard Stocks & Shares ISA because money invested cannot be touched until age 60, or until you buy your first property (without harsh penalties). So, be prepared to lock your funds away until age 60 if you’re using one for retirement savings.
However, I wouldn’t let that put you off. Like the SIPP, Lifetime ISAs allow you to invest in a broad range of investments, and all capital gains and income generated are completely tax-free, which is a huge plus.
In summary, if you are self-employed or freelancing, don’t panic about a lack of a workplace pension. By taking advantage of tax-efficient products such as the SIPP and the Lifetime ISA, you could still build up a sizeable pension pot by the time you retire.
