Pensions for the self-employed

What you need to know

Choosing your own hours. Being your own boss. Not having to make small talk with anyone by the printer. Being self-employed certainly has its perks, as more and more of the workforce is realising. More than 5 million people are now registered as self-employed in the UK, up from 3.2 million in 2000 1.

But self-employment has its downsides, too. And having no employer to set up or contribute to your pension definitely makes that list. 

While the government’s auto-enrolment initiative has made sure a majority of UK employees on a company’s payroll are placed in a workplace pension scheme, there’s no equivalent for the self-employed. 

It’s perhaps no coincidence that only 31% of self-employed people pay into a pension 2, compared with 84% of employees eligible for a workplace pension 3, creating a situation that the Association of Independent Professionals and the Self-Employed (IPSE) is calling a pensions crisis. 

And with the fastest growth in self-employment among the over 45s 4, how to fund retirement is a question that many will have to face up to sooner rather than later. 

Don’t let saving for your future slip any further down your priority list: here’s what you need to know about paying into a pension if you’re self-employed. 

Why you need a pension

Even if retirement seems a way off, there’s no escaping the fact that we’re going to need to fund it somehow. “Being your own boss has many attractions, but unfortunately it won’t stop us from getting old”, says Aviva’s Head of Savings and Retirement, Alistair McQueen. “One day, you’ll want to stop working. When that time comes, you’ll need another source of income – and that is where a pension can come in.” 

But why a pension and not something else? There are certainly other savings and investment accounts you can use to save for your retirement, such as cash ISAs and the lifetime ISA. But the fact is that pensions are built for the job and come with tax benefits that you won’t get elsewhere. 

With pensions, the government gives tax relief equal to the highest rate of tax that you pay. So if you’re a basic rate taxpayer, you only need to contribute £80 to end up with £100 in your pension pot. And if you’re a higher rate or additional rate taxpayer, you can claim back even more tax relief when you fill out your self-assessment tax return. 

It’s worth noting that there’s an annual allowance which limits how much can be paid into your pension each year while still receiving tax relief. It’s based on your earnings and is currently capped at £40,000. 

How much to pay into your pension

Government research suggests you’ll need between 50-70% of your pre-retirement salary when you finish work. With the state pension currently at just over £9,000 per year, you’ll likely need to top up that income with your retirement funds. 

Exactly how much you should pay into your pension depends on how soon you start. The earlier you begin, the less you’ll have to put away every month to afford a comfortable retirement. Starting late? You’ll need to save more.

Using a tool like My Retirement Planner is a good way to work out how much you might need to save each month. You can see what kind of income you could end up with based on different monthly pension contributions. 

Don’t rely on auto-enrolment changes

You may have seen reports that the government is extending the automatic enrolment scheme to the self-employed — but is yet to decide how to close this gap. 

Alistair McQueen explains: “Automatic enrolment has helped millions of employees save for their retirement, with their employer. But it currently does nothing for the self-employed. The government is looking into this but has stated no timescales for action.

“Rather than waiting for the government to act, the best thing the self-employed can do today is to take control of their retirement planning. The sooner people act, the better retirement outcome they should achieve.”

What to look for in a pension

If you've done even the briefest of research into pensions, you’ll know there are several different types, offered by many different providers. To help find a pension that’s right for you, it’s worth considering these factors:

Flexibility

If your earnings fluctuate, it can be a good idea to pick a pension plan that doesn’t tie you into paying in a set amount each month.

Fund choice

Some pensions offer more investment choices than others, giving you more ways of potentially growing your pot, or choosing a way to invest ethically

Charges

Pay close attention to how much you’ll be charged, as these charges reduce the amount in your pension pot.

Convenience

You’ll want to keep track of your pension, so check whether your provider gives you the option to monitor and manage it easily. Our own self-invested personal pension (SIPP), for example, can be managed through MyAviva online or via the app. 

Five tips to help you manage your pension

Starting a pension can certainly feel like a big commitment. It’s normal to find it overwhelming, but keeping these five things in mind should help ease your mental load. 

1. The sooner the better

When it comes to pensions, it pays to be an early bird. The sooner you start paying in, the more tax relief you’ll get from the government, and the more time your money has to potentially grow.

2. Try to pay in a regular amount

The thought of saving a large lump sum to pay into your pension can be daunting. Getting into the habit of saving for your future is half the battle for many people – so pay in what you can regularly.

3. Increase it when you can

If your earnings increase or you land a big contract, consider increasing your regular payments or paying a lump sum into your pension.

4. Picture your future

If retirement is still a way off, it can be hard to think of your future self and no longer working. So instead, picture the dreams and goals you’d like to pursue when you finish working. Thinking about the positive benefits of saving can be a good motivational tool. 

5. Have a regular review

Once every six months, take a look at your pension and consider whether you’re on track to save enough. Just remember that, as with any investment, the value of your pension can go down as well as up, and you may not get back as much as has been invested.

Over 50? Alistair has a tip. “Whether employed or self-employed, all of us aged 50+ are eligible to contact the government agency, Pension Wise, to discuss our pension options. Investing time with Pension Wise today could reap great reward tomorrow.”

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