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        Updated: April 08, 2024

        Sole Trader Pensions - A Quick Guide

        Are you a sole trader and looking to establish which pension option is right for you? This in-depth guide will outline everything you need to know.

        Ask a quick question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        We’ve published this short guide to make it easy for you to find out about pension schemes for sole traders. In it you can learn how to determine what type of pension might be best for you, find out about sole trader pension rules and more.

        Self-employed, and looking for a little help with your pension? Get in touch. We work with a group of fantastic specialists who are some of the leading experts on sole trader pension schemes. One of them will be happy to answer all your questions and help you understand and set up a pension which makes sense for your circumstances.

        What are my pension options?

        There are a few main types of pension for you to choose from as a sole trader, including…

        Self Invested Personal Pension (SIPP)

        An option suited to the hands-on investor, a SIPP gives you precise control around what is invested, and where.

        As a result, you’ll need to be confident in your abilities and willing to spend a little more time on your portfolio, effectively managing your own pension fund. Unless you’re experienced (or willing to learn) this may not be the right option for you.

        Stakeholder pensions

        Stakeholder pensions were designed to meet the government requirements for easily accessible pensions.

        They’re a simple option – low cost and relatively hands-off. They’re best suited to those who can only afford to make small contributions, and who aren’t too interested in a range of different investment choices

        National Employment Savings Trust (NEST)

        NEST is a government initiative, although it’s run independently.

        Initially designed to help smaller companies meet their legal auto-enrolment responsibilities, it’s now available to the self-employed. Relatively hands-off,  NEST offers a small selection of plans, depending on what you want to invest in, and your risk tolerance.

        What’s the best pension type?

        It’s a matter of personal preference. You may prefer the simplicity and low charges of a stakeholder pension, or the near-endless flexibility of a SIPP.

        If you want to open a pension, but aren’t sure which of the above might be best for you, get in touch. One of the experts that we work with can look at your circumstances and help.

        Speak to a expert today

        What is tax relief and how does it work?

        Pension tax relief for sole traders is, essentially, a way in which the government incentivises you to save for your future by investing the tax on money that you pay into your pension back into your plan.

        Assume that you’re a basic rate taxpayer, paying 20% income tax on your earnings.

        To make a £1000 contribution to your pension, you would only need to pay in £800, the government would invest the other £200.

        Now assume that you’re a higher rate taxpayer, paying 40% income tax. You would only need to pay in £600, the government would make up the rest.

        Limitations of sole trader pensions?

        Leading from the above, your pension contributions enjoy tax relief at source, but there are limitations you need to be aware of:

        They’re limited by your ‘net relevant earnings’

        Pension contributions for sole traders are limited by pre-tax profit for the year.

        Simply put, this is the amount of money you made in that year before tax, along with any other income (such as from employment). This makes sense – you shouldn’t be able to put more into your pension than your declared total income.

        They’re limited by your ‘annual allowance’

        Your annual allowance determines how much you can save into your pension for each year.

        For the current tax year (2019-20), it’s set at £40,000. If you’re in a position where you have more than £40,000 to save, you can ‘roll over’ the tax allowances you have built up over the last 3 years.

        There’s a ‘lifetime allowance’ to consider

        There’s also a limit that you can save into your pension over your lifetime.

        For the current tax year (2019-20), it’s £1,055,000. Note that this is not just for your sole trader pension contributions – it applies to any kind of payments you make into your pension (ie. money you may have saved in pensions from previous employment).

        Can I make employer pension contributions to myself?

        No. If you’re registered as self-employed, you’re not a ‘proper’ employer (as you only employ yourself). As such, you can’t make pension contributions to yourself.

        What is better for me, a sole trader or limited company pension?

        It’s worth bearing in mind that if you’re operating as a sole trader (and not operating a limited company) you may not be able to have a pension scheme for a limited company in the first place.

        But in either case, it’s like comparing apples and oranges. As a sole trader, or as a director of a limited company, you have access to a huge variety of pension plans.

        So whether you choose a sole trader or limited company pension scheme should really come down to how you prefer to structure your business – not the pension schemes that are available to that kind of business structure.

        Speak to a pensions expert today

        If you have questions about pensions for sole traders and want to speak to an expert for the right advice, call us today on 0808 189 0463 or make an online enquiry.

        All the advisors we work with are expert independent financial advisors. The service we offer is free and there’s absolutely no obligation.

        Ask a quick question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Tony Stevens

        Tony Stevens

        Finance Expert

        About the author

        Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

        Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

        FCA Disclaimer

        *Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us as well as any of our own are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

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