Pensions for self-employed people
Kay Linnell and Nick Wilson of Accounts Action Ltd shed some light on the different pension options available.
There are many different pension scheme variants, but they fall into two main categories – Defined Benefits and Defined Contributions.
- Defined Benefit schemes typically provide pensions based on how long a member has been employed by the pension scheme and their final salary. Their pension entitlement does not depend directly on the size of their contributions into the scheme. Most defined benefit schemes have either been wound up or closed to new members.
- Defined Contributions (also known as Money Purchase schemes) directly rely on the amounts paid into each individuals’ pension funds, and the investment performance of the pension administrator.
The main Money Purchase Schemes are Personal Pension Plans (PPPs), Stakeholder Pensions (Personal Pension Plans with restrictions on scheme charges) and Self Invested Pension Plans (SIPPs). There are also Free Standing Additional Voluntary Contributions (FSAVCs), for employees who wish to make contributions to a pension administrator other than their employer’s scheme.
PPPs and Stakeholder pensions are typically managed by large pension providers, and have limited options as to how individuals’ pension funds are invested. Individuals obtain basic rate (20%) tax relief on their own contributions, and higher rate (40%) relief if their taxable income exceeds the basic rateband. Employers can also contribute into their employees’ PPP, Stakeholder or SIPP funds, although the employee will not be entitled to any personal tax relief on those contributions. SIPPs vary from PPPs and Stakeholder schemes in that the beneficiary has far greater control of their fund, although it must still be held by a Pension Administrator for their eventual benefit.
The costs of each type of scheme vary – Stakeholder charges are limited to 1.5% of the fund annually until the tenth year, when the limit drops to 1%. PPP charges are not capped, and vary by provider and the contributor’s investment strategy. SIPP charges are typically higher still, to reflect the additional administration relating to them.
SIPPs allow a much wider range of investments, including commercial property, hotel rooms and assets from derivatives to gold bullion. The most relevant investment for an artist is commercial property and ground rents (excluding any assets relating to residential property.) The SIPP fund can buy commercial property to be used by the artist, and the rental income from the property will be exempt from tax. Further information on SIPPS can be found in this related article.
Some general information on pensions can be found on these sites:
- The Gov website has a useful introduction to the State pension and personal pensions
- State Pension calculator
- the Money Made Clear website for information on other pensions types
- the London Pensions Fund Authority website, the providers of many pensions for arts teachers and tutors in Further and Higher Education
Accounts Action Ltd is an Accountancy practice that specialises in helping artists, writers, actors, performers and entertainers with their accounts and tax returns. It also works with Financial Planners who can advise on arranging pensions, investments in property, share portfolios and annuities.