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Self-employed pension plans: which type is right?

Just 18% of an estimated 4.5 million self-employed people in the UK are contributing to self-employed pension plans. If you’re not one of them, perhaps it’s time to pick the right option and start saving.

Self-employed pension plans

For the 48% of employed people paying into a pension pot, the process is usually pretty easy – but things can be tougher for the self-employed.

The first thing you’ll need to do is pick one of the three types of self-employed pension plans available. Here’s a quick guide to help you choose the best one to meet your needs.

Personal pension plan

Personal pension plans provide users with both a lump sum and a regular income once they reach their long-awaited retirement.

They’re available to any UK resident under the age of 75. Easy to start, you can pick them up anywhere from a bank to a supermarket, so they’re also pretty convenient.

Essentially, you’ll be making regular payments that are invested on your behalf, though some options allow you to invest lump sums.

Yearly reports will let you know what your fund is worth and how much you should receive. That amount will depend on the payments made, your retirement age, and the success of investments. You’ll generally take 25% as a lump sum.

These are usually best for people who earn a regular amount each month and don’t want to take control over where the money is invested.

Stakeholder pension scheme

This arrangement also provides a lump sum and regular income once you retire, and is likewise available for anyone under 75 from numerous institutions.

However, stakeholder pensions offer a far greater degree of flexibility. You can pay in as little or as much as you like each month, with no penalties associated with increasing, decreasing, halting, or restarting your payments.

You might find there is a minimum contribution for each month, but this is capped at just £20. Additionally, there are no fees for transferring your current funds to another pension plan.

These are great for self-employed people who like to make large payments one month and small ones the next, or those who might like to switch pension plans later in life.

Self-invested personal pension

If you’re the sort of person who likes to maintain full control over how your money is invested, a self-invested personal pension, or SIPP, is likely to appeal. You’ll enjoy more freedom, and you’ll even be able to borrow against your funds for other investments.

A trustee will control investments under your instruction, though the range of options available is generally limited to what’s offered by the provider in question.

You can also appoint your own fund manager or stockbroker to take care of your investments for you. You’ll still enjoy tax relief on funds deposited, with no capital gains tax on growth and a tax-free lump sum once you retire. You can even borrow up to 50% of the plan’s funds.

Of all self-employed pension plans, SIPPs provide the greatest chance of maximising returns. Of course, not everyone willing to take on the added responsibility and risk.

Self-employed pension plans: a summary

A pension is a long-term investment, so consider the different options carefully before making a decision.

The type of pension you choose will depend on the degree of flexibility you require, the amount of control you want and your attitude to risk.

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