pensions for sole traders

Pensions for sole traders: what do you need to know

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It is time to talk about pensions for sole traders. The self-employed are far less likely to have a pension than those in employment, and for sole traders, it can feel like another level of confusion. But they don’t need to be this way. They can be easy and hopefully, this article will show you how.

What are the benefits of pensions for sole traders?

The benefits of pensions for the self-employed might seem obvious, but there are likely more benefits than you think. We all want to live a comfortable retirement and paying into a pension is one way to do that.

One of the best reasons to pay into a pension is that you get tax relief. This is money back from the Government straight into your pension pot. The amount that you receive depends on the amount of tax you pay.

Pensions are investments, therefore they are likely to grow and compound over time. This means that you stand a good chance of having more in your pot than you paid in. Certainly better potential than stuffing your cash under your mattress.

Furthermore, a pension with Raindrop is flexible. This means that as your income changes you can pay in more or less. There is no need to commit to regular payments if you don’t want to and family members can contribute to it too.

How much can I pay into a pension?

Pensions for sole traders work the same as they do for everyone else. There are no limits on the amount that you can contribute to a pension, but there are limits to the amount you can contribute AND claim the tax relief.

To receive the tax relief you can pay into your pension a maximum of £40,000 or 100% of your salary. For most people, this is more than enough, and instead of aiming for these figures you need to look at what you can afford and the amount of pension you would like when you retire.

pensions for sole traders

How to declare your pensions contributions on your self assessment

For a long time I was confused about how I should record and report my pensions contributions. As a sole trader, I wasn’t clear on whether they were a business expense or something entirely different. But I have done the research and can confirm that they are NOT considered a business expense. They are personal contributions.

However, you will still need to keep a record of your contributions and they will be entered into your self-assessment tax return. They have a separate section for pension contributions. If you are paying into multiple pensions, then you may want to record these separately, but they will be entered as a total. This is particularly important if you are a higher rate taxpayer, as you will need this information to claim your additional tax relief.

This is different for those who are directors of limited companies, who can make personal pensions contributions directly from the business. In this case, it is an allowable business expense.

Where to get a pension

I recently reviewed Raindrop, a pension service for the self-employed (both sole traders and limited company directors) over on my YouTube channel. Check out the video for full details.

Their simple tools and slick sign-up process made it easy to open a pension. Furthermore, they have a host of online calculators to help you work out how much you might need to pay in to get the sum of money you want when you retire.

If you have pensions in old pots, then they have an easy-to-use pension finding bot. It asks you questions about previous jobs and it will go searching on your behalf. Once they are found you can choose to transfer them or leave them where they are. This is a completely free service and Raindrop doesn’t charge you to transfer your old pensions to them. (Note: there may be exit fees from your old provider though.)

They have recently launched a Pension Finder which is similar to the service provided by the bot, but you don’t need to be a Raindrop pension holder to access it. All it takes is three simple steps and there is no obligation to transfer your pension at the end either. Great for finding those forgotten or lost pensions.

In addition, their fee structure is simple. With a flat fee of 0.75% regardless of the fund that you pick, you know exactly what you are paying for the service.

What is stopping you from starting a pension today?

When it comes to retirement planning, the best time to start was the day you were born, but now will have to do. What action can you take to get the ball rolling on your pension today?

Any information presented in this article is purely educational and NOT advice. If you have questions about your individual pension needs, then speak to a financial advisor. Capital at risk.

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