A pension plan is essential if you want to have a comfortable retirement. While most people are entitled to some degree of state pension, it’s really the bare minimum. Even if you qualify for the maximum full state pension, which is currently £179.60 per week, you won’t be able to afford much beyond the essentials.
There are ways to increase the state pension, such as deferring the age at which you take it, but the best plan is to have an additional pension plan set up. In fact, you can have more than one pension pot if you choose.
Sole traders have a few options when it comes to pensions and there are several different types of pensions in the UK, as this article from Procentia explains. Procentia provides pension admin software products for companies offering an occupational group pension.
In this article, we will offer a brief overview, but it is always a good idea to speak to an independent financial advisor before making a final decision. Look for an advisor not affiliated with a specific pension company. Check how the advisor is being paid, as if they are on a commission basis, their advice might be biased in favour of the company that pays the most commission, rather than suggesting a product that’s right for you.
What products are suitable for sole traders?
NEST pension
The National Employment Savings Trust (NEST) is a government pension initiative. It was originally introduced to ensure smaller companies provided pension plans for employees, but it is now available to the self-employed. NEST is run for the benefit of scheme members, rather than stakeholders seeking to make a profit from their investment.
Once enrolled in a NEST pension, you are given access to a user dashboard, where you can select the plan that you want to invest in, depending on your risk tolerance. The dashboard shows your total contributions to date.
Stakeholder pension
Stakeholder pensions are a low-cost, hands-off way of building a retirement pension pot. Employers often offer this type of pension, but if you are a sole trader, you can set one up for yourself. Pension contributions are eligible for tax relief, which is added to the pot by the pension provider.
This type of pension is ideal if you want to pay a set amount in each month and forget about it.
SIPPs
SIPPs or self-invested personal pensions work in a similar way to other pensions, but the difference here is that one of these pensions gives you access to a greater number of plans. You can opt to manage the investments yourself or hand the reins to a financial advisor. Think of a SIPP as an investment within a pension wrapper.
If you want to take a more hands-on approach to your retirement planning, investing your pension contributions into a SIPP is a good option. Some people choose to make all their own investment decisions, whereas others prefer to leave it to their financial advisor.
Choosing the right pension
It is important to start saving as early as possible. The sooner you start saving into a pension, the bigger the pot you will have at the end of your working life, all thanks to the wonder of compound interest.
Decide how much you can afford to contribute to a pension pot and how much time you want to spend on the admin. If your business is time-consuming, it is probably better to opt for a pension where all you need to do is make a monthly contribution and forget about it. A NEST pension of a stakeholder pension will be ideal in this instance.
If you want greater flexibility as to where your money is invested, consider a SIPP. Be aware that the charges for a SIPP will vary according to the investment options available.
Note that there are rules for sole traders. For example, there are limitations on how much you can contribute to a pension when you are a sole trader. You can’t pay in more than you earn in a year, so don’t plan on paying in a lump sum if the total contributions you make are greater than the pre-tax profit figure in your tax return.
Seek professional advice
Always seek professional advice before setting up a new pension plan or moving an existing pension pot into a new plan. The rules surrounding pensions are extremely complex and poor advice could cost you a lot of money when you eventually decide to retire and enjoy the fruits of your labour.
One of the benefits of taking professional advice before opting for a pension product is that you are given some protection if the pension product turns out to be the wrong one. Financial advisors are governed by a strict code of conduct. This article from the Citizens Advice Bureau has some useful advice on how to find a financial advisor you can trust.
