What pension can you get if you’re self-employed?

Whether you’re new to being self-employed, or you’ve experienced running your own business, paying into a pension may not be the first thing on your mind at the end of the month – especially if you’re focused on making your business more profitable.

However, data provided by the ONS suggest that just 20% of those who work for themselves actually pay into a pension. On top of this, our latest survey suggests that a household of two will need at least £28,000 a year to retire ‘comfortably’.

Fortunately, it’s never too late to set up a pension and start saving. In fact, it’s pretty easy. Take a look at our guide below to learn more about how to set up a pension when self-employed and how to make sure you pay into your pension regularly.

How much money do you need to retire?

Every year at Which?, we speak to thousands of retired Which? members, both those living alone and couples, to see where their money is being spent and what this averages out to over the course of a year.

For example, when we carried out our research in 2022, our data showed that households with two people spent roughly £2,340 a month, or around £28,000 a year to live what they deemed as a 'comfortable' retirement.

As you might imagine, this covers all the basic areas of expenditure (which had a combined cost of £19,000 per year on average) and some luxuries, such as European holidays, hobbies, and eating out.

So, when it comes to paying into a pension when self-employed, this is probably a good threshold to aim for on a yearly basis.

Why should you invest in a pension?

Although having savings set aside for retirement is certainly a good idea to make sure you have enough money to enjoy your new-found free time, there are certain benefits that come with setting up a self-employed pension that you might not be able to get elsewhere, such as the following:

1. Pension interest growth

First off, when you put money into a pension, it will naturally increase over time due to interest. And the more money you’re paying into a pension when self-employed, the greater the return on interest you’ll get. This also means that the earlier you start saving, the more interest you’ll earn on your pension.

You can use our pension calculator to estimate the size of your pot at retirement.

Based on our assumptions (also shown in the results) you’ll be able to see how much your pension could grow by each year, as well as the amount you may lose to pension charges.

2. A useful safety net 

According to the IPSE, 67% of self-employed workers are seriously concerned about saving for later life. And given how much they might need to have stashed away and how few are paying into a pension when self-employed, this is no great surprise.

Of course, this anxiety can be removed by setting up your pension and paying into it as soon as possible. Simply put, saving into a pension will give you peace of mind that you have a stable and growing pot of money, giving you plenty to live off during retirement.

3. Pension tax relief

Lastly, by investing in a pension, you’ll also get what’s known as pension tax relief on any contributions you make into your pension, which is basically ‘free money’ provided by the government.

For example, for every £100 you save into a pension, the government will add an extra £25. That’s right – the government will contribute an additional 25% of whatever you put into your pension.

Better yet, higher and additional rate self-employed taxpayers in England, Wales, and Northern Ireland can get extra tax relief on their pension contributions, with higher rate taxpayers (those who earn over £50,000) getting an extra 20%, and additional rate payers (those that earn over £150,000) earning an additional 25%.

However, it should be noted that you’ll need to claim this back yourself in your self-assessment tax return.

Meanwhile, in Scotland, you can claim an extra £1.58 for every £100 paid if you pay enough tax at the Scottish Intermediate Rate of 21%. As well as a further £26.58 if you pay enough tax at the Scottish Higher Rate of 41%.

It’s also important to note that, while you can save as much as you’d like into a pension each year, there is a limit on the amount that you will will get tax relief for - this is known as the annual allowance.

This is set at £40,000 for most people, or 100% of your earnings if you earn less than £40,000 for the 22/23 tax year.

Do the self-employed get a state pension?

Despite what you might think, self-employed workers are entitled to the UK’s self-employed State Pension scheme in much the same way as anyone else can receive a State Pension. 

The full self-employed State Pension is worth £185.15 a week or £9,627 in the 22/23 tax year. 

However, how much you get depends on your National Insurance record.

To get anything at all from your self-employed State Pension, you’ll need at least 10 qualifying years on your National Insurance record. to get any State Pension. And to get the full amount, you’ll need at least 35 qualifying years in total.

If you are missing years, then you may be able to apply for National Insurance credits, which can fill gaps in your record, and you can also do this by paying voluntary contributions.

As for the standard State Pension age at which you can cash it in, this is currently set at 66 for both men and women, though you can use our state pension age calculator to find out when you can receive it.

It’s also useful to note that the State Pension age but is due to go up to 67 between 2026 and 2028. It will also likely rise again to 68 between 2037-3039.

What type of pension can you set up?

Naturally, if you’re self-employed, you won’t have a company or workplace pension to save into, but you can still save for your retirement through a pension of your choosing. Here are the four most common types you can set up:

1. Personal pensions

As the name suggests, a personal pension is a standard type of defined contribution pension scheme and involves you paying a set amount of money each month to your chosen provider.

Generally speaking, your best bet to find the right provider to suit your own personal pension needs is to speak to a financial advisor, who’ll be able to recommend the right pension fund for you based on what you can contribute and how much interest you want to earn.

From there, you can choose where you want contributions to be invested from a range of funds the provider offers, and the provider will then claim tax relief at the basic rate on your behalf and add it to your pension savings.

However you’ll usually need to pay charges, such as an annual management fee and a switching charge, to your provider, if you decide to change your funds.

2. Stakeholder pensions

Stakeholder pensions differ slightly from other personal pensions because their associated charges are usually lower, and they tend to be flexible when it comes to monthly payment rates.

In some cases, the amount you pay into your stakeholder pension can be as low as £20 per month, and you can even choose to pay monthly or weekly. Alongside this, you don’t have to pay in regularly if you don’t want to, and you can contribute a lump sum whenever you want. 

Best of all, there’s no limit to the amount you can pay in, so if you have the funds, you can keep adding them to your stakeholder pension while still receiving tax relief on your payments.

3. Self-invested personal pensions (SIPP)

By far the highest earning of these four pension options, a Self-Invested Personal Pension (or SIPP), can be considered a high-risk, high-reward option for those who don’t want to invest through a pension company directly.

Essentially, a SIPP allows you to control where your money goes and how much it grows by – it’s basically a do-it-yourself pension. You'll be taking on responsibility for choosing and managing your own investments, and what level of investment risk you want to take.

However, this also means that you’ll need a solid understanding of finance and investing to avoid making mistakes, and the spare time to monitor your investments, which you might not have if you’re self-employed.

For this reason, SIPPs are best suited for savers who have the time and knowledge to pick and monitor their own investments or have the money to employ an independent financial advisor to handle their SIPP for them.

4. Lifetime ISA

Lastly, the UK government’s Lifetime ISA scheme officially launched in April 2017, meaning if you're under 40, you now have an alternative pension option to traditional personal pensions and SIPPs.

With this scheme, you can open a lifetime ISA if you're aged between 18 and 40, and any savings you put into it before your 50th birthday will receive the standard 25% bonus from the government.

Until you hit 50, you can add up to £4,000 a year, meaning if you did pay in £4,000 every year, you'd get a £1,000 bonus from the government. And if you were to do this every year from the ages of 18 to 50, you’d be left with an ISA totalling £160,000!

How to set up a pension when self-employed

Now that you know what all the different self-employed pensions you can choose from are, you’re probably wondering how you can set your pension up. Well, for the most part, you simply need to reach out to a pension or SIPP provider of your choosing and they’ll explain what options are available to you and how their personal set-up process works.

Alternatively, if you want to check on your self-employed State Pension, then you can visit the government website for more information on how to do this, as well for more details on how the UK Lifetime ISA works.

How much should I put in my pension?

As a general rule of thumb, most financial experts recommend saving a minimum of 10-15% of your monthly salary into your pension each month, though you can also follow the rule of your age divided by two.

Either way, paying this amount of your salary into your pension each month, before paying yourself in full, will ensure you have a comfortable amount of money in your pot that will be earning good interest over the following years.

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