What is the best pension for self-employed workers?

Auto-enrolment has seen millions more employees save for their retirement since it was introduced in 2012. But there is no such scheme in place for the self-employed – you are going to have to take matters into your own hands. Here we explain how.

Almost three-quarters of self-employed workers are not currently paying into a pension, according to research from investment platform Interactive Investor. Two-fifths of those who work for themselves do not have a pension at all.

Rising debt and the cost of living crisis being blamed, but pausing your retirement savings, even for just one year, can have a significant impact on your final pension pot.

This article will cover:

Read more: Everything you need to know about pensions

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Do you get a pension if you are self-employed?

If you’re self-employed*, then you will not have an employer organising and contributing to a pension scheme on your behalf. There is no auto-enrolment scheme in operation for you if you work for yourself.

You are still entitled to the state pension, as long as you have the sufficient number of contributing years. The full state pension – currently £203.85 per week, or £10,600 a year – is based on your National Insurance record and to receive it, you need 35 full years of recorded contributions. 

If you end up contributing less than that, but have at least 10 years’ worth of national insurance contributions (NICs), then you’ll get a smaller pension. 

Ultimately, the only way to get a pension if you’re self-employed is to set one up and pay into it. There are different types of pension for you to consider. Once you’ve decided, any money paid into a pension will benefit from government tax relief.

*Note: There are circumstances when a freelancer or contractor is not considered truly self-employed for tax purposes, if they are operating through their limited company. If your employment status has been determined as inside something called IR35, you might be entitled to auto enrolment. Find out more about IR35 and whether it affects you.

What are the different types of pension for the self-employed and how do they work? 

There are a number of different ways to fund your retirement as a self-employed person. You firstly need to decide what type of pension option suits you best. Here are some of the most common:

Personal pensions

You can access a standard personal pension from a number of the UK’s biggest pension providers. Insurance companies offer private pensions, which have become more competitive over the years, although charges still vary.

The pension offering can be quite simple. You are able to choose the level of risk you want to take, such as “cautious” or “adventurous”. Those who want to do the investing themselves might be frustrated by the lack of options.

Here are our top rated ready-made personal pensions based on our independent ratings.

Self-invested personal pensions (Sipps)

A Sipp could be a good option if you want more choice and control over where your pension is invested. These usually offer the widest range of investments with the most flexible retirement options and as a result, tend to carry higher charges than a standard personal pension.

Sipps usually allow you to access to real-time valuations and the ability to view and change your investments on a tablet or mobile app.

Choosing the right Sipp is important to ensure you have access to the investments you want and that the charges are competitive. Here are our top rated personal pensions based on our rigorous independent ratings:

Stakeholder plans

Stakeholder pensions tend to be the lowest-cost pension offering, with some available for about 0.6% or less a year. They typically offer low minimum contributions and are flexible if you want to adjust the amount.

If you don’t want to choose your own investments there’s usually the option for a default investment strategy. However, the fund choice may be limited. Plus income drawdown may not be available in retirement. Find out more in our guide on best ready made personal pensions.

Lifetime Isa

If you’re self-employed, a Lifetime Isa could be a good option for retirement saving.

Lifetime Isas allow you save up to £4,000 each tax year and instead of tax relief, you get a 25% government bonus on top of everything you pay in, up to a maximum of £1,000 each year. 

On this scale of saving – and putting aside any interest or investment returns – it is the same offer as a pension scheme, however there are other important considerations. These include different age thresholds for when you can access your money, differences in the way income tax is ultimately taken and pension perks that Lifetime Isas don’t have.

We explain these differences in detail in Should I get a pension or a Lifetime Isa?

How can I set up a personal pension?

Once you’ have decided on the type of pension that you want and the provider, you’ll need to decide on how much risk you are comfortable taking with your retirement savings.

Generally speaking, the more time you have before you plan to draw an income from your pension, the more risk you can afford to take in order to hopefully enjoy greater investment growth.

You can then decide to either make regular or individual lump sum payments to a pension provider when you can afford it. This flexibility is good for self-employed people, who might have incomes that vary.

“The key is get the ball rolling – even if it is just £25 a month – as the first step is often the hardest,” said Myron Jobson, senior personal finance analyst at Interactive Investor.

You should check with your provider that your pension scheme is registered with HM Revenue and Customs (HMRC) too – if it’s not registered, you will not get tax relief.

How much should I be paying into my self-employed pension? 

There are limits to how much you can contribute to your pension and still receive tax relief. For 2023/24 the maximum – known as the annual limit – is 100% of your salary, up to a maximum of £60,000.

The amount a self-employed person should save into a pension every month depends on a number of factors including your:

• income
• financial commitments
• financial goals
• retirement plans

“A commonly used – very basic – guideline is to halve your age, then use that number as the percentage of your income you should aim to save each year. So if you’re 30, you could aim to save 15% of your income toward your pension,” explained Jobson. 

We explain in more detail how saving 15% of your £32,000 salary at the age of 30 can equate to £256 a month in your pension.

“However, there isn’t a perfect formula for your to use. How much you need to save will depend on a number of factors, including when you started saving and your desired retirement lifestyle.

“You can get a ballpark figure by estimating your retirement needs and there are a number of retirement calculators to help you.”

We also look at what a pension pot worth £37,000, £150,000 and £500,000 can provide you in retirement to give you an idea of what you want to be aiming for.

What is the best way to save for retirement if you’re self-employed? 

The earlier you start saving for retirement and the more you can contribute to a pension while you’re earning comfortably, the less pressure will be on you during the lean work times.

A Sipp, for example, gives you access to a broad range of investments, including shares and funds and allows you to control how much you pay in, so you can make lump sum or monthly drip feed contributions. Note that this will be subject to any minimums set by your provider. 

A Sipp can also be a good home for any older pensions you might have accumulated over your working life. Combining your smaller pensions into one makes could make it easier to plan for retirement and might be more cost-effective (see below).

When lean times present themselves, it’s also heartening to know even small amounts can have an impact on your pension.

For example, if you are 50 years old with a pension pot of £200,000, paying in just £60 a month until you retire at 65 will increase your pot by £13,000, according to Hargreaves Lansdown*. This assumes annual investment returns of 5% and annual charges of 1%.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Contributing even small amounts can really add up over time. You get a boost from pension tax relief and time in the investment markets should help them grow.

“Even if you are at a point where you have no other choice but to stop contributing it’s a good idea to revisit this decision every few months so you can restart as soon as possible.”

Do you get tax relief on my self-employed pension contributions?

One of the biggest attractions of pension contributions is the tax relief you get, which applies to both employed and self employed workers.

The relief you will receive depends on your tax band. If you’re a basic-rate taxpayer, then you get 20% tax relief on your contributions. So for every £80 you contribute another £20 in tax relief tops this up to £100. You don’t have to do anything to get this top up as it is claimed on your behalf by your pension provider.

Tax relief is even more generous if you are a higher or additional-rate taxpayers. You will get relief of 40% and 45% on your contributions but you will need to proactively claim the additional amount via a self-assessment tax return.

Read more about tax relief on pensions in our simple guide and tax returns – including who has to file one.

Are pension contributions tax deductible?

A good way of reducing the amount of tax you pay as a self-employed worker is to make pension contributions into your pension scheme. These are tax deductible – whether you’re a sole trader or the director of a limited company. 

For example, you are a sole trader earning £100,000 contributing £50,000 gross into a Sipp, you:

• You pay £40,000 into the SIPP
• Sipp receives £10,000 tax relief, resulting in £50,000 being paid into the scheme
• You complete a tax return claiming the additional £10,000 tax refund
• As such the £50k received by the pension fund only cost the individual about £30,000

Alternatively, you are the director of a company with £200,000 profits, which contributes £50,000 into your pension

• Company pays £50,000 directly into your pension
• This is a tax-deductible expense, so the company is only subject to corporation tax on £150,000 rather than £200,000
• The amount paid into the your pension is not assessable on you, so the amount is paid into your pension and you incur no income tax or NI on this amount

This can be a complex area of tax so it’s key that you get guidance from an independent financial adviser.

What is pension consolidation? 

As a self-employed worker you might consider locating your old workplace and personal pensions and combining them into one pension plan.

This way you can:

• Know more easily how much you have in retirement savings and how far you are off target
• Invest your money in a wider and more flexible range of investment options than might be available through some old schemes
• Save on charges, as if you own several pensions you’ll pay for each one, which could be more expensive especially over the long-term

Transferring a pension isn’t a straightforward decision, however. Old workplace pension schemes often come with valuable benefits that would be lost if you transfer your money out. Taking advice from an independent financial advisor is key before deciding to consolidate your pensions.

See how we helped Lisa weigh up whether she should consolidate four pensions.

Pension quiz: Should I consolidate my pots?

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