Self-employed pensions guide

Business Advice | 2 September 2020 | 4 years ago

Self-employed pensions
Set up a self-employed pension before it’s too late
According to the Pensions Advisory Service, fewer than a third of self-employed people in the UK contribute to a personal pension. When it comes to saving for your retirement, the sooner you start the better.

If you work for yourself, setting up a self-employed pension is perhaps one of those tedious jobs you keep putting off. With the current State Pension paying just 175.20 per week, or 9, 110.40 per year (for the tax year 2020-21 – with full National Insurance contributions), it might be time to start saving for your retirement before it’s too late.

This handy guide covers everything you need to know about self-employed pensions.

Follow a link to jump ahead or read on for all the information:

The benefits of having a pension if you are self-employed

When you’re self-employed you have to take responsibility for things most employees take for granted. While employers are legally obliged to enrol their employees into a workplace pension, when you’re self-employed, it’s up to you to make provisions for saving for your retirement.

It may not be the most exciting thing to spend your precious time doing, but a little time invested now could make the difference between an uncomfortable retirement and a relaxed and enjoyable one.

By saving for a pension you can reap the following benefits:

  • Tax relief on contributions:you are eligible for tax relief on contributions, up to a maximum of 40, 000. This pension tax relief means for every 100 you save into your pension the government will add 25.
  • Low-cost access to professional money managers:depending on the kind of pension plan you open, your retirement savings can be invested in a wide range of assets, with the funds managed by professional investment managers.
  • No inheritance tax: If you die before the age of 75, your pension can usually pass to your beneficiaries without inheritance tax being applied.
  • More choice on retirement: Pension freedom rules allow a greater degree of choice when it comes to ways you can use your pension pot when you retire, including taking 25% as a tax-free lump sum.

The main things to consider when setting up a self-employed pension

Start early

The earlier you start saving, the more money youll be able to invest, and your pension savings will have more time to grow. All adding up to a greater chance of being able to enjoy a financially comfortable retirement.

Tax relief

By paying into a pension you benefit from tax relief on your contributions. If you pay tax at the basic rate you can get an additional 25 from the government for every 100 you pay into your pension pot. This tax relief applies on pension contributions up to a total of 40, 000 a year; this is called the annual allowance.

If you’re a higher rate taxpayer, you can claim a further 25 for every 100 contribution through your tax return.

Any pension contribution above 40, 000 in a year won’t benefit from further tax relief. However, if you have any unused annual allowance from the previous three years you can usually carry this forward.

Transfer your old pensions

If you have previously contributed to a pension, or have an old workplace pension, you may want to consider combining these into your new personal pension plan for ease of management.

Pension providers make it relatively simple to transfer your pension, although it’s important that you make sure that the new investment you are making is comparable to your current arrangement and that the charges are in line with expectations. Poor fund performance and high charges will erode your pension fund, so make sure you check the finer details before you commit.

If you know you have previous pensions but arent sure who the provider was, try using the Pension Tracing Service. If you know the name of the employer or the pension provider, you can use this government pension tracing form.

Get professional advice

Being self-employed means taking more responsibility for your future finances. Without an employer to provide your pension plan, or make additional contributions, it’s up to you to make sure you can afford the retirement you want. But that doesnt mean you can’t get help.

Most pension providers will offer some kind of advice service to help you open the right pension, but the advice will be biased towards the aim of having you open a pension savings plan with them.

For independent and impartial advice, speak with an independent financial adviser. Regulated by the Financial Conduct Authority (FCA), all financial advisers must adhere to strict rules.

Some financial advisers are tied to only one or a small group of product providers, but a truly independent adviser will search the market to find the most suitable pension product taking all your personal circumstances into account.

The Pensions Advisory Service is a useful online resource which offers a Midlife Review to self-employed people between the ages of 35-55.

Pension Wise provides free and impartial government guidance? about pension options to those aged 50, or over. A conversation with a Pension Wise advisor will last up to an hour and cover your pension options, the tax treatment of each option and provide guidance on next steps you can take.

Pensions advice allowance

If you need to pay for advice on your pensions and already have pension savings, the pension advice allowance lets you withdraw 500 from your pension fund to pay towards the cost of getting the retirement advice you need.

Designed to help you fund advice at different stages of your working life, you are allowed to withdraw 500 a total of three times, but only once in any calendar year. As long as you use the money to pay for financial advice, you won’t be charged tax on the withdrawals.

How much should I save?

How much you should save into your pension fund depends on how much you can afford and how big you want your pension pot to be when you reach retirement. It also largely depends on how old you are and how many years you are away from retiring.

Starting to save early could more than double your pension pot on retirement:

Your Monthly Contribution? Government Contribution? Age You Began Saving Total Pension Fund at 65
£100 £25 30 £70, 000
£100 £25 40 £46, 000
£100 £25 50 £25, 000

*Calculations assume savings grow at 5% per year with charges of 0.75% a year

The general rule of thumb for calculating what percentage of your income you should save is to halve your age. For example, if you start saving at age 30 then save 15% of your income into your pension, if you start saving at age 50 then save 25%.

A more reliable way to work out how much you need to save into your self-employed pension plan is to use a pension calculator, which most pension providers make available online. These calculators will work out your estimated retirement income based on factors such as how long you’ve been saving, how much you currently save and the number of years remaining before you reach retirement.

It may not be easy to commit to a consistent and regular contribution to a pension scheme when you’re self-employed and you may need to be more flexible in how you save for you retirement. Fortunately, many pension providers allow flexible contributions, so make sure you check this before you open your new self-employed pension plan.

The different types of self-employed pensions available

There’s a choice of three types of pension you can choose when you’re self-employed:

1. Ordinary personal pension

Offered by the majority of pension providers, this is a defined contribution pension which lets you choose how and where your money is invested, according to the investment funds available from your chosen provider. The pension provider is responsible for claiming the basic rate tax relief on your contributions and will automatically add this to your pension fund.

If you qualify for tax relief at a higher rate, youll need to claim the additional tax relief on your annual tax return.

By choosing a scheme specifically designed as a self-employed personal pension you should also benefit from the flexibility of choosing when and how to make contributions based on your income and ability to afford payments into your pension fund.

2. Stakeholder pensions

Some employers offer stakeholder pensions to employees, but individuals are also able to open stakeholder pension for themselves. If you have concerns about high administration charges eroding your pension fund, a stakeholder pension might be a good choice; the maximum charge on stakeholder pensions is capped at 1.5%.

As well as capped charges, you can also start and stop contributions without incurring a penalty.

However, one of the drawbacks you may find with a stakeholder pension is that you may be limited to the kind of investment you can use for your retirement savings.

3. Self-invested personal pensions

A self-invested personal pension (SIPP) provides a wrapper? in which you hold investments until you retire. This type of pension offers the most flexibility of any self-employed pension option, due to the wide variety of investments and asset classes you can choose between.

Charges and fees associated with SIPPs are higher than ordinary personal pensions or stakeholder pensions, and you may want to seek expert professional investment advice to ensure you’re making sound financial decisions.

As well as these three main types of pension schemes, you could also consider opening a NEST pension or using an ISA to save for your retirement.

Set up a NEST pension

The National Employment Savings Trust is a government workplace pension scheme but is also available to some self-employed people.

NEST charges tend to average out at about 0.5% for most pension savers. This makes it the cheapest pension option for the self-employed, although not necessarily the most profitable, as you may be able to access improved investment performance elsewhere.

Visit the self-employed section of NEST to check your eligibility.

Open an ISA

Some people prefer the flexibility of saving into an Individual Savings Account (ISA), instead of – or as well as – having a pension. You can currently save up to 20, 000 a year into an ISA (2020-21). Although you don’t get tax relief on your contributions, your savings grow tax-free.

When you want to withdraw funds from your ISA you get 100% of your money tax-free. When you withdraw funds from your pension you only get 25% tax-free, while the rest is taxed as income.

An investment ISA allows you to invest your money into a range of assets and you can invest a lump sum or make a regular monthly contribution for as little as 25 per month.

Unlike pensions, there are no restrictions on when you are allowed to access funds invested in an ISA.


There’s no pre-defined best option for saving for your retirement when you’re self-employed but making provision for your future retirement shouldnt be put off indefinitely.

The options outlined here should help clarify which pension would best suit your own individual circumstances. If in doubt, don’t hesitate to seek professional advice from a pensions expert or financial adviser.



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