Setting up a private pension if you're self-employed
Self-employment has surged in popularity over recent years. In fact, around 4.2 million UK workers were classed as self-employed in the first quarter of 2023, according to the latest official statistics. Trends such as working from home amid the Covid-19 pandemic may have inspired others to become their own boss.
Flexibility on hours and greater choice over the work you do are among the benefits of going it alone. However, pensions for self-employed people can appear less straightforward than for other workers. For example, workplace pension schemes - where an employer contributes to your savings pot - aren't available to the self-employed.
The good news is that setting up a private pension is simple and can place self-employed workers on the path to a secure retirement.
Can self-employed people get the state pension?
The state pension is a weekly payment (usually paid every 4 weeks) offered by the Government to support your income once you retire. Self-employed workers should be eligible for payments once they reach the state pension age - currently 66 for men and women.
The eligibility rules are the same as those for employees on a company payroll. You'll need 10 'qualifying years' of National Insurance (NI) contributions to get anything - and 35 years to receive the full weekly payment of £203.85.
As a self-employed worker, you can build a qualifying year towards your state pension by paying weekly Class 2 NI contributions. The payment is set at £3.45 in the 2023/24 financial year. Weekly voluntary contributions of £17.45 can also add qualifying years to your NI record.
There's so much going on when you set up a business that it may be tempting to base all your retirement plans on the state pension. However, it's only really meant to be a top-up for your other sources of retirement income.
Setting up a private pension scheme (also called a personal pension) can offer peace of mind that your retirement will be comfortable.
Benefits of private pensions for self-employed workers
Whether you're newly self-employed or have been your own boss for decades, saving into a private pension offers many advantages.
Don't rely on the state pension
Working out a target retirement date can be tricky when you're self-employed, especially if your income changes drastically from year to year. With a private pension scheme, you can start to map out what your later years might look like - and reduce your reliance on the state pension.
Any personal pension you set up as a self-employed worker should offer the same tax benefits as a workplace scheme. Basic-rate taxpayers will receive 20% in tax relief from HM Revenue and Customs. It means that for every £80 you contribute, the tax authorities will top the figure up to £100.
If you are a higher or additional rate taxpayer, you can claim additional tax relief through your self-assessment tax return.
Safety net for loved ones
Setting up a private pension can support your family if you pass away at an early age. Pension benefits are usually available free of tax to your beneficiaries if you die before the age of 75.
Self-employed private pension options
You won't find a specific self-employment pension plan when weighing up your saving options. Instead, you'll have three main types of private pension to choose from.
Traditional personal pensions
By signing up for a personal pension, you can make a contribution each month, with your provider claiming tax relief on your behalf. Your money will be invested in assets such as shares and bonds, just like a workplace defined contribution scheme.
That means your returns will be influenced by the investment performance, as well as your contributions.
These have similar features to traditional personal pensions but must follow specific government rules. They're often used as pensions for self-employed people because they guarantee to allow low minimum contributions (for example no more than £20 a month), the ability to stop and start payments, and capped charges.
Self-invested personal pensions (SIPPs)
SIPPs are a type of personal pension that give you more freedom over where your contributions are invested.
They're designed for pension savers who are keen to take a hands-on investment approach and have previous experience of the markets. You can hand-pick investments in assets such as stocks and shares, unit trusts, bonds, and commercial property.
How to set up a private pension
The UK's growing population of self-employed workers is matched by a huge range of pension saving options. In fact, setting up a private pension should be easy – just do a quick online search and compare the different features offered by each provider.
Think hard about what you want from your pension before signing up to any products. For example, what charges are you likely to pay? Could you reduce your contributions if your income suddenly went down? How much control will you have over where your money is invested?
Above all, just remember that being self-employed is no barrier to pension saving. Instead, researching a self-employed private pension should be towards the top of your to-do list.
Learn more about the pension saving process with our retirement advice service. You can use MoneyHelper's pension income calculator to get a glimpse of what your retirement years might look like.
Are there limits on pension contributions for self-employed people?
Yes, an annual allowance of £60,000 (or 100% of earnings if lower) applies each financial year. Tax relief will not be available on pension contributions above that level.
The tax authorities may allow you to carry over any unused annual allowance from the previous three financial years, which will help if you exceed the limit.
How do I withdraw money from a private pension?
Pensions offer a range of options when accessing money in retirement.
From the age of 55 (57 from April 2028), you'll normally have the opportunity to withdraw 25% of your savings tax-free as a lump sum. You can then convert the remaining funds into an annuity to receive a regular income in retirement. Income drawdown and further cash withdrawals are other options to research.
How high should pension contributions be for self-employed workers?
There's no one-size-fits-all pension contribution for the self-employed. Your projected annual income, current trading performance and retirement goals are among the issues to consider when working out how much to pay in.