How much should I save in my pension scheme?
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I’m in my late thirties and self-employed. I don’t currently have a pension scheme and wonder if it’s time I started to think about that. Do I have to save a specific amount like my wife does for her work pension or can I just put in what I can afford?
Matthew Hinchliffe of Smith & Pinching responds:
I’m pleased to read that you are looking to start a pension. It’s something that many self-employed workers often put on the back burner until later and subsequently have to put more aside to achieve what they need to meet their retirement objectives.
Opening a personal pension is relatively straightforward, but you will need to think about how much you want to put aside and how you want it set up. It may make sense for you to make a regular contribution to your fund each month, so that you get into the habit of contributing without having to consider how much each time, but in fact you don’t have to do it that way. Some of my self-employed clients opt to do a contribution once a year, for example.
You can invest up to 100pc of your qualifying earnings in your pension. However, the most you can invest and still receive tax relief (the Annual Allowance) is £40,000 per tax year. This is a “per person” allowance – the total you can contribute across all your pensions – and includes all contributions from you and any other sources. You should note that there is a reduced Annual Allowance for very high earners and those who have started taking flexible benefits from their fund.
As you are self-employed, you don’t get an employer’s contribution to your fund, but you will be able to take advantage of the available tax relief: you will get the sum you’ve paid in tax on the contributions paid into your pension, adding immediate value to your fund.
I think it would be beneficial to sit down with an independent financial adviser and talk through what you want to achieve for your retirement. You can then put together a plan that matches your contribution levels to those targets.
The money you contribute to your pension will be invested for growth. Investments do involve an element of investment risk and your fund’s value may go up and down as markets change, but you should achieve growth in the long term, although this cannot be guaranteed. It’s important to understand the concept of investment risk, so discuss this with an adviser and ensure that you are only taking a level of investment risk that is comfortable for you.
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Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk