Updated: March 09, 2023
Self-Employed Pensions Guide
What choices do you have for a pension when you’re self-employed? Find the key information to make sure your pension plans will work for you in retirement.
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Author: Tony Stevens - Finance Expert
Updated: December 02, 2022
Being self-employed can be both thrilling and terrifying. Full responsibility for your cash flow, clients, and productive output lies with you. But in between the hustle and bustle of running a business, it’s vital that you take the time to set yourself up for your financial future.
Choosing a pension scheme for self employment and making regular contributions into your pension will give you peace of mind that you’ll be well taken care of in your later years.
In this article, we’ll give you some guidance on how to get started with finding and setting up the right pension for you.
In this article, we cover…
Seeking professional advice before deciding to transfer a UK pension is highly recommended (in certain circumstances it is a legal requirement). Once you’ve read through the details below, make an enquiry and we can arrange for a pensions advisor we work with to contact you directly.
Setting up a pension for self-employed
If you’re self-employed with no pension, preparing for retirement is crucial as you won’t have an employer paying into your pension. The sooner you start saving into a self-employed pension the better.
Starting early means you benefit from more tax relief and more compound interest growth on your savings. In fact, starting early could more than double your pension pot.
Whether you have plenty of savings to invest in your pension, or saving into a pension is a stretch for you, there are pension options to suit every need.
A defined benefit pension is common for the employed – it pays out a retirement income based on your salary while you were in employment. Self-employed pensions are defined contribution pensions, and these function more like a tax-friendly savings account.
Do self-employed workers qualify for a State Pension?
If you’re self-employed, you’re entitled to a State Pension just like those in employment.
For the current tax year, 2018/2019, a State Pension would give you just £168.60 a week, if you have paid all the required National Insurance contributions. In addition to this, the age for State Pension retirement keeps getting older.
By 2037, it’s due to hit 68, this could pose a problem should you need to retire sooner and have access to retirement funds. For most people, this makes getting your own pension a necessity for retirement years.
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Self-employed pension requirements
If you are self-employed, planning for your retirement is vital. The current state pension pays out just £168.60 a week (at the time of writing) and there’s no guarantee what the sum might be at the time you’re ready to retire. If you want to achieve a better than basic quality of life in your retirement years, you’d be wise to plan for that now.
Although there is no specific law requiring you to have a pension plan when you’re self-employed, if you can afford to set some money aside on a regular, or even semi-regular, basis, when it comes to retiring, it could make all the difference.
There are various ways you can plan for your retirement and if you don’t like the idea of having a pension plan per se, you could consider using an ISA or property investment to provide your future income. Both of which are discussed later in this article.
If you wish to talk to an expert about your options, make an enquiry for a free, no obligation chat. All the experts we work with are independent financial advisors, we’ll match you with someone experienced in helping self-employed people plan for their retirement years.
UK Pension Schemes for the self-employed explained
There are three personal pension types for the self-employed in the UK.
How do self-employed pensions work?
You can choose between a stakeholder pension, a personal pension, or a self-invested personal pension (SIPP). These pensions differ in terms of how much you have to pay in charges, the investment options available to you, and how much flexibility you have over how much and how often to pay into them.
Online Money Advisor works with expert self-employed pension advisors who can help you match your situation and future needs with the right pension. Get in touch on 0808 189 0463 or make an enquiry and we’ll put you in touch with one of the pension experts we work with.
Ordinary personal pensions for self-employed
A personal pension is a popular option with the self-employed. It’s a type of defined contribution pension and allows you to choose where to invest your money within your providers’ range of funds. The provider will also claim tax relief for you from the basic tax rate and add this to your pension savings.
If you’re a higher rate taxpayer, you’ll need to claim the additional tax relief through your tax return.
With a personal pension designed for the self-employed you can choose whether to add regular contributions or make payments into your pension when you are able to.
Stakeholder Pensions for self-employed
A stakeholder pension is a defined contribution personal pension with options for flexible and low minimum contributions. Charges are capped and you can select a default investment option instead of making your own investment decisions. As someone who is self-employed, you can start your own stakeholder pension.
Although they are offered by some employers, you can also start one yourself.
Stakeholder pensions offer:
- Flexible and low minimum contribution options
- Limited and low charges
- Cost-free transfers
- A default investment fund which you opt for if you prefer not to choose your own investments
For someone who is self-employed and starting from scratch with small amounts to contribute to a pension every month, a stakeholder pension may be the right option. It allows for low minimum contributions as well as having low flat rate charges.
If you’re interested in setting up a stakeholder pension, an expert pensions advisor can help find you a provider with minimal fees who matches your requirements..
Self-invested personal pensions
A Self-invested Personal Pension (SIPP) for the self-employed functions in a similar way to a personal pension; the main difference is that it offers more flexibility and choice over how to invest your pension pot. Alternatively, you can choose to pay an authorised investment manager to invest your savings for you.
Charges for SIPPS can tend to be higher than other personal or stakeholder pensions.
SIPPs are often considered to be better suited for people with experience in investing who would like to self-manage their funds, or for those with large pension funds.
If you’re interested in how you might benefit from a SIPP arrangement, get in touch and we’ll introduce you to one of the pension experts we work with. They will be happy to answer your questions and help you make a pension arrangement which best suits your circumstances and budget. Call 0808 189 0463 or make a quick online enquiry.
The service we offer is free and there’s absolutely no obligation.
Getting a NEST pension as self-employed
An alternative option for the self-employed is to get a government National Employment Savings Trust (NEST) pension. The NEST pension scheme is run as a trust for the benefit of its members.
Although the NEST was set up for the government’s auto-enrolment programme, it also accepts people who are self-employed.
For most savers, NEST charges work out at about 0.5%, making it a cheaper option than many stakeholder options.
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Getting advice on how to set up your pension plan
Each pension scheme type is designed to match a particular need: the scheme that’s right for you will depend on factors such as how much you’d like to pay into your pot, how much money you’ll need for retirement, and how much flexibility you’d like for contributions and investments.
If you’re unsure of which scheme would work best for your retirement needs, it’s worth consulting a self-employed pensions adviser who can make a recommendation based on your specific circumstances. Make an enquiry and we’ll put you through to a financial expert.
All the experts we work with are experienced independent financial advisors with access to pension providers across the entire UK. They will be happy to answer your questions and provide free, no obligation advice.
What is my annual allowance for saving into a pension?
You can put as much as you like into your pension each year, but there’s a limit on the amount of self-employment pension savings that will get tax relief. This limit is called the annual allowance.
For the 2019 – 2020 tax year, the annual allowance is set at £40,000.
This means that you won’t get tax relief on pension savings above the £40,000 limit. However, it is possible to carry forward any unused annual allowance from up to three years prior.
What are the benefits of setting up a self-employment pension?
Setting up a self-employment pension brings many benefits which amplify your savings and grow your funds for future years.
Here are some of the advantages you’ll gain when you set up a pension:
- The government will add at least 25% in pension tax relief, so for every £100 invested the government will add £25 to your pension.
- A good pension plan will offer inexpensive access to professional investment managers.
- Your pension can usually be passed on to beneficiaries without inheritance tax deductions if you die before the age of 75.
- Pension freedom rules mean you have more options for what to do with your savings when you retire. It’s now possible to take out 25% of your pension pot as a tax-free lump sum from age 55, instead of having to wait until the government retirement age.
Are self-employed contributions based on gross or net income?
Some experts recommend contributing around 15% of your pre-tax income, but there’s one golden rule that experts agree on: you should make the most of your pension pot benefits by starting as early as possible.
If you’re making contributions to a self-employed pension plan, the contributions you make will be from your net income. Your pension provider will claim basic-rate tax relief and this rebate will be added to your pension pot.
What you get back will depend on how much you put in and how your investments perform over time.
Can I backdate my self-employed pension contributions
The standard rule for tax on pension contributions is that you can have tax relief on up to 100% of your earnings or a £40,000 annual allowance, whichever is lower applies.
Contributions over these limits won’t attract tax relief.
As an example, you could earn £25,000 but decide to put £30,000 into your pension (maybe by using some savings) but you’ll only get tax relief on £25,000 rather than the full £30,000 contribution.
However, it is possible to carry forward any unused allowance from the previous three years, so long as you were in the pension scheme during those years.
If you’re concerned that your pension pot is going to fall short in retirement and want advice on the options you may have, talk to one of the retirement planning experts we work with. Make an enquiry and we’ll match you with an independent financial advisor experienced in helping people in similar circumstances.
How to self-assess your self-employment pension plan
Whether you opt for an active role in your pension investment plan, or choose a managed investment fund, it’s wise to occasionally check in and see how your investments are performing and how quickly your savings are accumulating.
You will usually have an option to view your pension online, so you can measure progress towards your retirement goals.
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How big will my self-employment pension be when I retire?
How much you have stashed away in your pension for retirement will depend on:
- How many years you have been saving for
- How much you have paid into your pension
- How well your pension investments have performed
- How much your pension provider has taken out of your pot to cover their charges
The UK government recently relaxed rules on when pension funds can be withdrawn, so you now have more choice and flexibility on when you can take money out of your pension pot.
ISA versus self-employed pension
You may be wondering whether you should opt for an ISA, a lifetime ISA, or set up a self-employed pension. For most self-employed, experts recommend a combination of ISAs and pensions.
ISAs can be useful for having a savings pot which also allows you to access your funds before retirement, should the need arise. This could be useful if your self employment earnings fluctuate.
A self-employed pension scheme, however, offers tax relief on your pension contributions that matches how much you pay in income tax.
Growth on your pension is also exempt from income tax and capital gains tax. Once you choose to cash in your contributions, the first 25% you withdraw will be tax-free.
In addition to this, if you pass away before you reach retirement, your pension will be passed on to your beneficiaries tax-free.
When can I withdraw from my self-employment pension?
You can withdraw your pension funds once you reach age 55, but there are some extenuating circumstances which allow you to withdraw your pension sooner.
When you withdraw your pension you can take 25% out as a tax-free lump sum.
As long you’re over 55, you can take out as much money from your pension as you like, but funds that pass the 25% mark will be subject to your marginal rate of tax.
If you pass away, your pension will be passed on to your spouse or other beneficiaries, as long as an “expression of wishes” has been completed.
Can I combine my workplace and self-employed pension?
If you’re self-employed and receiving a pension, it’s often a good idea to find out if it would be beneficial to combine and transfer your pensions from any previous workplaces into your new pension plan.
There are online tools such as the Pension Tracing Service which can help you to track down your previous pension providers. A financial advisor can help with these details and will ensure that your pension plan fits your individual circumstances.
Can I get an NHS pension as self-employed?
The NHS Pension Scheme is only available to self-employed individuals who are;
- General Practitioners
- Non-GP providers
- General Dental Practitioners
- Ophthalmic Medical Practitioners
Under the new pension rules introduced by the government, general practitioners working for the NHS on a self-employed basis will see a rise in the contributions paid into their NHS Pension Scheme in line with their senior rank.
How to carry out a self-employed pension comparison
With many good pension options available to you as self-employed, you may be wondering how to best compare pension schemes.
An apples to apples comparison of pension fees and terms won’t be easily feasible when searching for a pension as which scheme is right for you will depend on the specifics of your needs and situation.
Before choosing a pension, it may be necessary to take financial advice. Wherever you’re based, the pension advisors we work with have helped people across the whole of the UK find a self employment pension scheme that suits their needs.
A pensions advisor can help you compare your investment options, show you tax-efficient ways to save for retirement and assess the performance and risk of any existing defined contributions pensions you may have.
Speak to an expert advisor today!
If you’re self-employed and haven’t yet set up your pension, don’t delay with getting a pension plan in place. Compound interest on your savings will make your money go much further and last longer.
Unless you have a thorough knowledge of the pension market, it’s best to get help from an independent pensions advisor.
A financial advisor will know how to reduce your pension charges while getting you a pension deal that’s tailor made for your needs. Even a fraction of a percentage point less in your pension charge rate will likely leave your pension pot thousands of pounds better off as your savings compound over time.
Call Online Money Advisor on 0808 189 0463, or make an enquiry to speak to one of the vetted pensions experts we work with. We don’t charge a fee, and there’s absolutely no obligation.
If you’re self-employed you’re automatically eligible for the State Pension, as long as you have made your National Insurance contributions.
Anyone who has 35-years worth of National Insurance contributions is eligible for the full pension amount, which is currently £168.60 per week.
If you’re on a low income and self-employed you may struggle to afford to contribute to a personal pension plan. However, if your income fluctuates and sometimes you earn more, for example, if your work is seasonal, then you may find it useful to make some separate savings to help provide some income in retirement.
Otherwise, your best bet is to ensure you’re up to date with your National Insurance contributions. If you have 35 years worth of NI contributions on retirement, you should be entitled to the full State Pension when you reach retirement.
You can chat to one of the experts we work with on 0808 189 0463 for free, no obligation help.
Although you don’t have to pay NI contributions unless you earn more than £6,365 in a year, by paying voluntary class 2 National Insurance contributions, you could get a higher State Pension.
In order to simplify NI contributions, the government has intentions to abolish class 2 contributions. You can read more on the government website here.
To ensure a certain quality of life in your retirement, it’s wise to make additional pension arrangements, even if you qualify for the full State Pension. If you wish to discuss the kind of arrangement which may be suitable and affordable for you, make an enquiry for a free, no obligation chat with one of the expert advisers we work with.
This really depends on how reliable and consistent your income is.
To find out about all your options and what kind of pension arrangement might best suit your circumstances, talk to one of the expert advisors we work with. Make an enquiry for a free, no obligation chat, and we’ll match you with an independent financial advisor who will be happy to answer all your questions and find you a pension plan to suit your needs.
If you have a self-employed pension, the returns you can get are exactly the same as anyone else who was saving into the same pension arrangement.
The returns you get on any pension arrangement are solely down to the contributions you make while you are working, and the performance of the investment over time.
To ensure your pension contributions are working for you and provide the income you would like in retirement, talk to one of the pensions experts we work with.
Make an enquiry and we’ll match you with an expert who will be happy to answer all your questions and advise you about the best ways to make sure your pension arrangements will deliver on retirement.
Because salary sacrifice is a scheme for employees to exchange a portion of their salary in order to gain extra benefits from their employer, salary sacrifice for self-employed people isn’t possible.
If you’re self-employed, topping up your pension is possible. In doing so, you also have the extra benefit of being able to manage the amount of tax you need to pay.
Make an enquiry to talk to one of the pension experts we work with and find out more about topping up your self-employed pension plan.
If you work as a self-employed teacher, you can arrange a pension. If you have previously been a member of the Teachers Pension scheme, it may also be possible to transfer your pension to a new arrangement. Make an enquiry and we’ll match you with one of the experts we work with, ensuring they have the relevant experience of pension transfers for teachers.
If you work as a self-employed taxi driver, you’re likely to have highly fluctuating income patterns, but this doesn’t mean you shouldn’t be planning for your future. As a self-employed cab driver, the information in this article all applies to you, as it does any self-employed person.
If you wish to talk to an expert in self-employed pensions for bespoke advice make an enquiry and we’ll match you with an expert who will be happy to answer your questions and advise you on the kind of pension arrangement which might best suit your circumstances.
It’s possible to make contributions to your spouse or partner’s personal pension. If you wish, it’s even possible to contribute to a child’s personal pension – which will help them to build retirement benefits from a really young age!
There’s no restrictions to the number of different schemes you can belong to. However, you must abide by the limits on the total amount you contribute if you wish to receive tax relief on your contributions.
If you live in Ireland and have an approved self-employed pension arrangement, you can benefit from tax relief on your contributions. You have to pay Pay Related Social Insurance (PRSI) and the Universal Social Charge on your contributions but, in return, you get tax relief.
Tax relief is determined by your age and increases as you get older:
|Age||Amount which qualifies for tax relief|
|Under 30 years:||15% of net earnings|
|30 – 39 years:||20%|
|40 – 49 years:||25%|
|50 – 54 years:||30%|
|55 – 59 years:||35%|
|60 and over:||40%|
The 40% maximum qualification for tax relief also applies to certain professionals and people who have specific occupations, irrespective of age when earning may be limited, for example professional athletes.
There is also a €115,000 limit on the earnings which will be taken into account.
The amount of tax relief you can claim on pension contributions in Scotland are different to the relief you get on contributions made in England, Wales or Northern Ireland.
If you pay tax at the Scottish Intermediate Rate of 21, you can claim £1.58 more for every £100 you contribute to your pension. If you pay tax at the Scottish Higher Rate of 41%, you can claim a further £26.58.
Some people choose to invest in property instead of making pension contributions. However, doing this means that you could miss out on potential tax relief which you can claim when you’re contributing to a pension arrangement.
If you’re keen to include property investment in your retirement plan, it may be worth considering a self-invested personal pension (SIPP). Although there are limitations, you can’t for example, use a SIPP to invest in residential property directly, commercial property can often form part of a SIPP investment.
SIPP arrangements can be more expensive in terms of fees and charges, but, if you’re keen it’s definitely something worth investigating as, in the right hands, they can deliver strong returns. To learn more and find out if a SIPP might be a good option for you, talk to one of the expert pension planners we work with. Make a quick enquiry to get started.
What used to be called the Widows Pension is now called the Bereavement Allowance.
You’re eligible for the Bereavement Allowance if:
- Your spouse died before April 2017
- You were over 45 when your spouse died
- You’re under State Pension age
- Your spouse paid NI contributions, or they died as a result of an industrial accident or disease
If your spouse died after 6 April 2017 you may be able to claim Bereavement Support Payment.
Your spouse can also inherit the remainder of your pension pot after your death, if your pension benefits from the government’s Pension Freedoms.
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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.
About the author
Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.
Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.