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Pensions for the self-employed: What to know

January 27, 2023
Saving for a pension when you’re self-employed can prove more of a challenge than if you’re working for an employer. Unlike workplace pensions, there are no employer contributions, no scheme for you to be auto-enrolled in and also your income may vary from month to month.In the UK there are around 4.2 million self-employed people — yet, it’s estimated that more than half of these aren’t actively saving into a personal pension.Getting to grips with pensions for the self-employed may seem daunting, but don’t worry. In this post, we’ll help to explain some of the rules on pensions and outline different options for self-employed pension plans.

Do you need a personal pension if you’re self-employed?

If you’re self-employed, it’s your responsibility to contribute towards your pension savings.However, when you make the switch to self-employment, it’s on you to contribute towards your retirement income.

Could you manage on the state pension alone?

You’ll still be entitled to the State Pension in the same way that anyone else is and this will be based entirely on your National Insurance record.For those who reached State Pension age before 6th April 2016, you’ll be entitled to the the basic state pension, set at £141.85 per week.
Note: To claim the State Pension, you’ll need at least 10 years of qualifying National Insurance contributions to qualify for the basic state pension. Check out Money Helper’s guide on tax and state pension rules to learn more.

Even when inflation increases are taken into account, most people would struggle to have a comfortable retirement with the State Pension alone. At the time of writing, retirement age is set at 66 and is likely to rise further in the future. In contrast, you can currently access a private pension funds from the age of 55 — making it important for self-employed people to consider other pension plans.

What are the options for pensions for self-employed workers?

Some entrepreneurs regard their business itself as their pension fund and plan to sell it on when they retire. But, for many, they themselves are the business, and might find the business falls in value when sold.To avoid relying on this, there are a number of different saving and pension schemes for the self-employed are available. The main options are summarised below.

Private or personal pension

Regardless of whether or not you’re working, you and other people can make pension contributions into a personal pension known as a defined contribution or ‘money purchase’ pension. This means that the amounts you pay in are invested in a wide range of assets and funds – the same as with a workplace pension.

Self-Invested Personal Pension (SIPP)

A SIPP is a tax-efficient personal pension offering a wider range of investment choices than other personal pensions, putting you in control of how your pension pot is invested. It can also provide a practical way of combining two or more pensions.

National Employment Savings Trust (NEST)

As a government-backed scheme, NEST is also available as a pension for the self-employed. Those who work for themselves can use the scheme instead of setting up a personal pension.

It should be noted that NEST isn’t the same as the State Pension. Although it is government-backed, the money comes from worker and employer contributions, rather than taxpayers.

Lifetime ISA (LISA)

Lifetime ISAs aren’t a pension, but are similar in the sense they’re designed to help you save for the future. On this scheme, for every £4 you pay in, the government will add £1. You can pay in a maximum of £4,000 each year for a £1,000 bonus added at the end of the tax year.

Although you can’t save as much as you would into a pension, you won’t be taxed when you withdraw the money.

How to choose the right self-employed pension plan for your needs

As you will have seen, various pension options are open to self-employed people. If you’re wondering how many pension pots can you have, you can have more than one personal pension, combining different options — for example, a stakeholder pension alongside a Lifetime ISA — if you choose.Before deciding on the right self-employed pension option for you, it’s important to consider the following factors:

Do you want flexible contributions?

As your earnings may fluctuate when you’re self-employed, you may want to choose a stakeholder personal pension that gives you flexibility over both how much you pay in and how often.

Are you looking to manage your investments?

Some types of personal pensions offer greater investment choices than others, giving you more options for growing your pension fund. An SIPP is a good example of this, as it, not only gives you flexibility with how much you can pay in, but also offers a wider range of investment options.

Are you clear on the charges?

You should also consider the charges you will be required to pay your personal pension provider. All pension funds charge management fees, however SIPPS tend to have lower fees than other types of pension for the self-employed because you will be managing them yourself. Stakeholder pensions also tend to have lower charges, with charges capped at 1.5%.

Are your needs likely to change?

If you’ve gone from being employed with a workplace pension to being self-employed, then convenience should be an important consideration.NEST works well as a pension plan for the self-employed, as it allows you to keep your NEST pension if you ever decide to go back to being employed.You can also continue to make contributions with any new employer if they are registered with NEST.

What are the tax rules on pensions for the self-employed?

While some of your private pension is tax-free, you’ll be taxed if your total annual income is more than your Personal Allowance. If you take a large amount from your private pension, you might have to pay Income Tax at the end of the tax year.Similar to personal pensions, you can only claim a certain amount of tax relief on your self-employed pensions. If you’re a basic rate taxpayer, you’ll automatically be entitled to tax relief at 20%, while higher rate taxpayers, can claim an additional 20% tax relief by filing Self Assessment tax return.Note: Always check with your provider that your pension scheme is registered with HM Revenue and Customs (HMRC) — if it’s not registered, you won’t get tax relief.

How much should you pay in to your self-employed pension?

Before deciding how much you want to contribute, you should consider what you can afford to pay in each month, as well as how much you would ideally want to receive when you retire.Your age will play a big factor in your level of contributions. If you’re still young, then you can start small, but if you’ve started to save later in your working life, then you’ll need to make larger payments each month to grow your retirement pot.If in any doubt, you should always seek independent financial advice.