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If you’re self-employed, you’re not getting the benefit of a workplace pension. You need to make your own pension provisions as the state pension is unlikely to be enough to meet your retirement needs.
In this article, our experienced team of independent financial advisers guides you through everything you need to know about pensions when you’re self-employed.
As tricky as it can be to set money aside for a pension when you are running your own business with all the financial demands that entails, and potential fluctuations with income and cashflow issues, the sooner you start building your pension pot the better.
This way, you can maximise your chances of funding a comfortable retirement rather than worrying about making ends meet, especially when people’s life expectancy is generally increasing.
Note: All UK-based individuals are eligible for the government’s state pension, whether employed or self-employed, as long as they meet the National Insurance contributions criteria.
When you are employed, you are automatically enrolled in a pension set up by your employer; you don’t get a choice on either the pension or the provider.
However, when you are self-employed, it’s up to you which you choose. Not only do you get to select your pension provider, you can opt for a self-invested personal pension (SIPP) which gives you greater flexibility on the investments that are included in your pension.
There are tax perks too, gains from your pension investments are tax-free and you can access lump sums from your pension from the age of 55 (this minimum age is rising to 57 from 2028).
If you are registered as a sole trader, your pension comes from your net profits and the government adds tax relief at the basic rate of tax – currently 20%. This means that every £100 you contribute to your pension is technically only costing you £80. And, if you’re a higher rate taxpayer, you might be able to claim more tax relief through your self-assessment form.
Usually, pension payments for limited companies are taken from your turnover as a business expense. This means that you pay less corporation tax, however the tax relief isn’t added to your pension. Returns on your pension investments will generally be free from Income Tax and Capital Gains Tax.
You have two choices of pension when you are self-employed – a personal pension or a SIPP.
A personal pension could be a better option if you’re less investment savvy. You decide on the level of risk you’re comfortable with and your pension is invested in one or more funds that are run by an investment manager whose intention is to get the best possible return for you. Personal pensions usually have lower running costs than SIPPs.
With a SIPP, you have more control over the investments within it. You can choose from a wider variety of investment products including shares and commercial property. You are also able to manage the investments yourself so it’s important that you have a pretty good understanding of the various investments’ level of risk and past/projected performance.
Self-employed pensions are chosen by the individual, rather than the employer, whose responsibility it is to automatically enrol every employee into their workplace pension scheme.
With workplace pensions, both the employer and the employee contribute to the pension, whereas when you’re self-employed you’re the only person building your pension fund. Regarding the levels of contributions, with a workplace pension the minimum percentage you contribute and the regularity is set by your employer. When you are self-employed, you decide how much you pay into your scheme, and how often.
Self-employed pensions are always defined contribution pensions, where the value of your pension accumulated by retirement is dependent on the amount you have invested and how those investments have performed. Most workplace pensions are also defined contribution pension schemes, however some employers offer a guaranteed lifetime income based on a percentage of the employee’s salary.
All UK-based individuals get the same annual allowance for tax-free pension contributions. For the 2024/2025 tax year, this is £60,000. The ‘carry forward’ rule means that you can use any unused allowance from the previous three years.
Your personal contributions are still limited to your earnings or net profits within the tax year that you’re paying your contributions, even if this is less than the unused allowance you’ve got available. However, it can be really beneficial to carry forward these amounts if you weren’t able to use all your pension allowance when you were setting up your business and had other priorities for your money.
The earlier you start saving for your retirement, the longer you have to build up a substantial sum to contribute to your standard of living when you do retire.
You might be surprised at the dramatic impact investing in a pension earlier rather than later could have on the pension pot you build up.
As you can see from the example below, it could potentially more than double, if you compare starting at age 30 than at age 45!
For example, if you saved £150 per month into a pension fund, this is the amount you could expect to accumulate, assuming a growth rate of 4% each year:
Plan starts on your: At 67, you could have:
30th birthday £152,703
35th birthday £116,892
40th birthday £87,563
45th birthday £63,542
This example doesn’t take into consideration tax relief or inflation, it’s just an example of how the fund may grow based on specific assumptions. Growth rates may vary and, as the value of your investment could go down as well as up, there is no guarantee that you’ll get back what you put in.
Most self-employed individuals invest in a personal pension (sometimes referred to as a private pension).
There are three kinds of personal pension: ordinary personal pensions which most large providers offer, stakeholder pensions which have capped charges and self-invested personal pensions which could have a wider range of investment options.
Your pension provider will typically give you all the information you need to make up your own mind, on a non-advisory basis, regarding the investment fund options to choose from and levels of attitude to risk. They will claim tax relief on your behalf and add it to your pension pot.
Various factors have an impact on the amount of money you will receive from your pension, including the amount you invest, how well your investments perform and how much you pay in management fees.
Although it’s mostly for PAYE employees, self-employed people can also invest in Nest – the National Employment Savings Trust. This is a government-initiated scheme run as a trust by the Nest Corporation. It has no owners or shareholders and it’s run with the best interests of its customers at its heart. However, investment choices are limited.
There is no upper limit to the amount you can invest in a pension. However, the amount that you can get tax relief on is limited. This is what’s referred to as the ‘annual allowance’.
Tax relief is applied to whichever is the lower amount; £60,000 or 100% of your earnings. This figure applies for each tax year.
Our qualified, knowledgeable and friendly team of independent financial advisers is here to discuss your pension options. They can go through your financial obligations with you, to help you decide how much you can afford to pay into your pension, and which pension might be right for you.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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