Retirement Planning

You may only just have started working for yourself. So when do you start to think about retirement? The answer is - now!

It is never too early to start providing for your retirement. Any delay severely reduces the final benefit when you retire. As a self-employed person, you pay class 2 and class 4 National Insurance contributions. Class 2 contributions only qualify you for the basic state pension, and class 4 contributions do not get you any pension at all. They are simply an extra tax on the self-employed. Anyone who has tried to live on the basic state pension will tell you that it is not easy. So how can you start to provide for your retirement?

You can pay pension premiums into a personal pension scheme, and into the stakeholder pensions. Up to 1988 you could have paid into retirement annuity schemes. These ceased for new contributions in 1988, but if you had a scheme in force then, you can carry on contributing to it.

Personal Pension Schemes

The contributions to a personal pension scheme attract tax relief at your top marginal rate of tax. Because of the generous tax relief, there are certain restrictions.

Restrictions

The main function of a personal pension scheme must be to provide a retirement income. Therefore, you are precluded from taking benefits before the age of 50. There are, however, younger age limits agreed by the Inland Revenue for certain occupations. These include such things as downhill skiers, athletes or sportspersons, dancers, trapeze artists, divers, etc. You must take the benefit by age 75 at the latest.

The provision of life assurance is permitted as a secondary purpose of a personal pension scheme, but it must be subsidiary to the main purpose.

You may also take a percentage of the benefits in the form of a tax free lump sum when you retire and start taking benefits. This is limited to 25% of the fund in your personal pension scheme. The rest of the fund must be used to provide an annuity for the rest of your life (or the joint lives of you and your partner).

Limits of tax relief

Tax relief on the premiums is only given against relevant income. This includes self-employed earnings, employed earnings, and profits from furnished holiday lettings. If you do not have those types of income, you may pay into a personal pension scheme, but only up to £3,600 each year gross (£2,808 net).

There is a limit on the contributions that qualify for tax relief. The limits depend on your age at the beginning of the tax year, and the amount of your net relevant earnings, as follows:

Age at the beginning of tax year Percentage of net relevant earnings

up to 35 17.5%

36 to 45 20%

46 to 50 25%

51 to 55 30%

56 to 60 35%

61 or more 40%

There is an overall limit to the net relevant earnings figure on which the percentages are based. At the time of writing this is £102,000 of net relevant earnings.