How much money should I invest in my pension?
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I’ve been working as a self-employed consultant for about 10 years now – I’m in my late thirties – and make a decent income overall although it fluctuates from month to month. I haven’t ever set up a pension scheme so I’m not putting anything aside for my retirement so far, but I think it is time I did so. I’m a bit nervous about setting up a regular payment as my income varies so much. Can I decide how much to put in each month or does it have to be a regular amount?
Phil Beck of Smith & Pinching responds:
I’m really pleased that you are going to start saving into a pension scheme for your retirement. Far too many self-employed people don’t have anything other than their state pension when they retire.
It is possible to be quite flexible about how much you contribute to your fund each month and there are a number of ways to do that. You could, for example, set up a basic contribution each month that you know you can cover, even in months of low income, and then make additional contributions on an ad-hoc basis when you feel comfortable about committing additional funds to the pot. Alternatively, you could perhaps look at your accounts at year-end and decide what an affordable contribution for the year might be and make a single contribution for the year.
Personally, I think that a regular contribution of some sort is a good idea, as it might be all too easy to decide not to pay money in if you opt for a single annual contribution.
Saving into a pension is very tax-efficient: you get tax relief on your contributions so for every £8 you contribute, if you’re a basic rate taxpayer, the government will add a further £2 automatically through your pension provider. If you’re a higher or additional rate taxpayer it’s even more – although you may need to claim the extra relief through your self-assessment tax return.
There are lots of different pension providers and you may feel some confusion about where to hold your pension savings. It’s important to understand the charges that may be levied both by the pension provider and by the funds in which you are invested. An independent financial adviser can help you select a provider and suitable funds: it’s important that your fund is invested in a way that is right for you in terms of your attitude to risk, pension goals and personal preferences.
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