Do self-employed workers get a pension?

Most employees are now enrolled automatically into a workplace pension scheme. Unfortunately, no such provision has been made for self-employed workers.

As a self-employed person you are responsible for setting up your own private pension.

What options are available for self-employed people to save for retirement?

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It can be harder for self-employed people to save for retirement thanks to unpredictable levels of income and uncertainty over future work. Locking away funds until the age of 55 can be hard to swallow.

But saving for retirement doesn’t have to mean you have no access to your money if you were to need some of it in an emergency. An option introduced by the government in 2017 – the Lifetime Individual Savings Account (ISA) – could be a more flexible long-term saving option for many self-employed workers if they can’t commit to a specific amount each month.

The Lifetime ISA is available as both a cash or stocks and shares product. If you're considering the stocks and shares option bear in mind your capital is at risk. Due to market fluctuations the value of your investment could go down and well as up which means you could get back less than you put in.

How Lifetime ISAs work

Like other types of ISA, Lifetime ISAs offer tax advantages. These mean that any returns on investments held inside the ISA as well as any interest paid on cash deposits are free of tax. Tax treatment depends on individual circumstances and may be subject to change in the future.

But Lifetime ISAs differ in that they are limited to people aged 18 – 39 and are designed specifically to encourage saving for either a deposit on a home or for retirement. At present individuals can put up to £4,000 a year into a Lifetime ISA (until they turn 50), and any money that goes into it is eligible for a bonus payment of 25 per cent – up to a maximum of £1,000 annually – from the government.

The bonus is added until the saver turns 50 and is paid on top of any investment returns or interest payments. But if money is withdrawn before the age of 60 and not used to buy a first home, it is subject to a 25 per cent charge, which could mean you get back less than you invested.

Lifetime ISAs and pensions

Pensions also have tax benefits. Any contributions to a pension are eligible for tax relief, typically at 20 per cent (for basic-rate taxpayers) or 40 per cent (for higher-rate taxpayers). But pensions don’t qualify for any extra government bonus payment, and the money you take out of a pension is liable for income tax.

It's also important to note that money held in a Lifetime ISA could affect means tested benefits. So always consider how the product fits with your individual circumstances, before taking it out.

Under current rules, money in a pension isn’t normally available until the holder turns 55. With a Lifetime ISA, on the other hand, the cash can be accessed at any point. Although, as explained above, early withdrawals are subject to a 25% charge.

A Lifetime ISA shouldn't be considered a replacement for a pension. However, for younger self-employed workers who might worry about having their money tied up, the Lifetime ISA could be an attractive option.

Find out more about the OneFamily Lifetime ISA, which is invested in stocks and shares, here.

Note: We take care to ensure Talking Finance content is accurate at the time of publication. Individual circumstances can differ so please don't rely on it when making financial decision.

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