When you’re self-employed, you’re effectively ‘self-pensioned’, because unlike many securely employed workers, you don’t have the luxury of relying on an employer to arrange and contribute towards your pension; you instead have to arrange and be the sole contributor to your own.
And, because your self-employed income can fluctuate and a regular income isn’t always guaranteed, choosing and committing to a self-employed pension plan can seem a little overwhelming.
This reluctance to take out a private pension has been highlighted by the Financial Lives 2020 Survey conducted by the Financial Conduct Authority (FCA) which reveals that a whopping 55% of self-employed workers did not have a pension in accumulation in 2020.
If you’re one of those 55%, below we provide pertinent self-employed pension advice to help assist you with your retirement planning by answering your most frequently asked questions such as “what pension schemes are available for self-employed people?” and “how much should I save?”
Armed with the information in this guide, you can confidently set about choosing and setting up a pension so that you can comfortably look forward to enjoying (and affording!) your precious twilight years.
Yes, all self-employed workers in the UK are entitled to a State Pension based on their National Insurance Contributions (NICs).
The rate at which you pay NICs falls into two classes:
If your profits are less than £6,525, you will have the option not to pay your NICs. However, we strongly recommend that you avoid having any payment gaps in your NICs where possible as you will not then get the full State Pension at your State Pension retirement age.
If you simply can’t afford to pay NICs one year, you can pay voluntary contributions at a later date (usually only within 6 years of a missed payment) to bring your State Pension up to speed, if eligible.
Most self-employed workers can pay their NICs via the Self Assessment process if they submit their Tax Return online.
To be eligible for a State Pension, you will need:
Click this link to check your State Pension forecast on the government’s website and to find out how your State Pension is calculated (and more besides) click here.
Note: It is strongly recommended by financial experts that you do not solely rely on your State Pension for your retirement income. The current full/new State Pension payment of £179.60 per week (which is £9,339 per year) will probably be insufficient to comfortably live on and that full amount is by no means guaranteed, especially if you ‘contracted out’ of the State Pension.
There is no single/niche type of pension for self-employed workers, but you can easily set up and pay into a personal/private pension, in addition to paying your NICs for entitlement to your State Pension.
A personal pension allows you to choose from a variety of funds in which you want your pension contributions invested.
The three personal pension options you can choose from are:
Jump to What is the best type of pension for self-employed workers? below for more information on personal pension options and choices.
Yes, your self-employed pension contributions are eligible for tax relief up to the annual allowance amount of £40,000 or if you earn less, 100% of your salary. Higher rate taxpayers can additionally claim tax relief on their Tax Return.
Your pension provider will automatically claim tax relief from the government on your behalf.
The pension contribution tax relief is at the current basic rate of 20% so if you pay a contribution of £80, the government would add to that an additional £20 making your gross pension contribution a nicely rounded £100.
John Greer, a financial expert from Quilter says that “whatever age you are, save half of it”.
If you take this advice on board, in the table below, we give examples how much of your salary this percentage contribution could potentially amount to:
Age |
Salary % |
Income |
Yearly Contributions |
Monthly Payments |
|
20 |
10% |
£20,000 |
£2,000 |
£166 |
|
30 |
15% |
£30,000 |
£4,500 |
£375 |
|
40 |
20% |
£40,000 |
£8,000 |
£666 |
Government research indicates that you will require between 50% and 70% of your regular salary to comfortably retire.
The easiest way to try and gauge how much you should save, based on your salary, age, pension fund and planned retirement age, is by using an online Pension Calculator.
Ultimately, the very best advice we can give to you on how much you should contribute towards your pension is that you pay as much as you can afford and start doing so at the earliest age possible.
There is ‘no one size fits all’ best personal pension for the self employed and what works best for you will depend on your own individual circumstances.
As mentioned above, you should make sure you pay all your Class 2 or Class 4 National Insurance Contributions to get the best State Pension payout possible.
In addition, to further build up your pension pot, you should take out a private pension. You have three main options to choose from:
Contributions are invested, typically in stocks and shares, to provide you with a retirement income.
Very similar to a standard personal pension but with limitations on annual charges, contributions and a smaller choice of investment options. This could be a good option for some self-employed workers with a fluctuating income who want to make low and flexible contributions, as you can stop and start payments at any time. This type of pension will usually give an average return on default investments.
Riskier and cheaper than the other types of pensions and only recommended for those with a nose for investment opportunities or who take professional financial advice. You can individually choose all the assets you would like to invest in and to get the best return, you will need to regularly monitor and adjust your investments, as and when necessary.
Whilst this isn’t a specific government scheme for the self-employed, there is a government scheme self employed workers can now apply to join (that was previously only available to employed workers) called NEST.
NEST stands for ‘National Employment Savings Trust’ and is a not-for-profit corporation initially set up by the Department for Work and Pensions to ensure all employers could afford to provide pensions to their workers.
However, NEST pensions are now available to the self-employed as long as they meet the following criteria:
You can sign up as a self-employed member on the NEST website.
So, to sum up, the best ways to save for your retirement when you’re self-employed are to:
Ultimately, if you reach State Pension Age and have an insufficient income to live off, you can try applying for Pension Credit. Check out our blog: What is pension credit and how does it work for more info.