So you’re ready to set up your own pension plan. Here’s what I did.
1. First, look at your employment situation. There isn’t much point in being a one-man limited company any more; if you’re a service provider charging a day rate or similar, go self-employed instead. The reason: it makes you eligible for Class 2 National Insurance Contributions for the Basic State Pension. While the Basic only pays out a small amount per week (currently £105 from age 67) it costs a self-employed person as little as £2.50 a week (for 30 years) to secure it.
(You pay Class 4 on top, but only at 9% above a certain level of profits, and it tops out with a marginal percentage of just 2% when your profits exceed £40k.) Being government-provided and linked to average earnings, it’s a great deal (who wouldn’t appreciate an extra four hundred quid, index linked, every month in a few decades for just a few percent downpayment?)
So check you’re eligible for Class 2 Contributions. If you’ll build up fewer than 30 contributing years before you hit 67, apply to catch up. (Having spent part of my life overseas, I’ll only pass the 30-year requirement in my 60s.) Bear in mind an average-salaried individual will pay £200 a month in NI to get the same basic entitlement; if you’re self-employed, that money can be going into your private pension pot instead.
2. Next, talk to a financial advisor if you like, who will advise you to open a private pension plan. If you’re in my situation – self-employed UK citizen with your own business and wild income swings – there’s only one choice: a Stakeholder Pension Plan. They’re designed for people on lower incomes, but since the contributions ceiling is £50k/year – around twice average household earnings – the “low income” bias isn’t relevant in practice.
(If you’re an employee, the first £3,600 per year is eligible for tax relief, so if you pay up to this out of your after-tax income, an £80 monthly investment will be topped up to £100. The self-employed of course don’t get this, but other benefits balance out.) The other great thing about Stakeholder Plans is that money managers’ fees (the killer) are capped at 1.5% per providing company. There are fancier alternatives, like SIPPs, but if you’re looking for a tax-efficient wrapper for financial assets, a Stakeholder is all you’ll ever need.
When choosing a provider, look for three things:
Web-based account servicing. You want the Web because you’re going to be looking at your funds regularly; make sure your provider’s web services are up to scratch. Look for a provider the same way you’d look for a new bank – secure web access and the ability to conduct business entirely online. (I haven’t been into a bank branch in years.)
A broad choice of funds to invest in. The UK’s bigger pension providers, like Legal & General, have a choice of over 60 funds that fit into a Stakeholder Plan. It’s less well known that Stakeholder Plans let you self-invest, but it’s one of their biggest advantages. Make sure the choice of funds your provider gives you covers a broad array of geographies, business sectors, and financial instruments from index trackers to government bonds.
Fee-free fund reallocations. Make sure your provider allows you to flip and switch your money between different funds as often as you like. Some providers even allow an unlimited number of switches per month. At minimum, you want the option to completely re-allocate your pension pot four times a year.
3. Check and recheck. Make sure your employment status is correct; make sure your Class 2’s are being paid by direct debit; test your Stakeholder Plan’s online servicing features. And you’re set up. Next: my investment strategy.