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

What Pension Can You Get If You're Self Employed In this article

If you’re self-employed, paying into a pension may not be the first thing on your mind. In fact, just 20% of those who work for themselves pay into a pension, according to the latest ONS figures. 

However, a household of two will need at least £28,000 a year to retire, according to our latest survey. If you’ve not set one up, it’s never too late to start saving.

Here, Which? explains why you should save into a pension, and how to set one up. 

How much do you need to retire? 

Every year we speak to thousands of retired Which? members, both those living alone and couples, to see where their money is being spent.

Households with two people spent a shade under £2,340 a month, or around £28,000 a year, on average to be 'comfortable' when we carried out research in 2022.

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. Aiming for this level of income will provide a good platform for your retirement. 

Do the self-employed get a State Pension?

Self-employed workers are entitled to the State Pension in the same way as anyone else.

The full 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, you’ll need at least 10 qualifying years on your National Insurance record to get any State Pension.

To get the full amount, you’ll need at least 35 qualifying years to receive a full State Pension.

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

The state pension age is currently 66 for men and women, but it’s due to go up to 67 between 2026 and 2028. It will rise again to 68 between 2037-3039. 

Use our state pension age calculator to find out when you'll receive it.

Reasons to save into a pension 

Here’s why you should consider saving into a pension as a self-employed worker. 

Your savings will grow  

The earlier you start saving, the better. The aim of investing your money into a pension is to help grow the money into a larger amount. 

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

Our assumptions (also shown in the results) cover how much your pension will grow by each year, as well as the amount you lose to pension charges. 

We've assumed your funds grow by 6% per year, and you pay annual charges of 0.75%. We've also factored in inflation, at 2% a year. 

Peace of mind

According to the IPSE, 67% of self-employed workers are seriously concerned about saving for later life. 

As we said above, you may not get all of the State Pension and it won’t provide you with enough to retire on its own. 

Saving into a pension will give you peace of mind and mean that you have enough to live on when you retire.

Tax relief 

You’ll also get tax relief on any contributions you make into a pension, which is like ‘free money’.

For example, for every £100 you save into a pension, the government will add an extra £25. 

Higher and additional rate self-employed taxpayers in England, Wales or Northern Ireland can get extra tax relief on their pension contributions.

Higher rate taxpayers (those that earn over £50,000) can get an extra 20% and additional rate payers (those that earn over £150,000) can get 25%.

You’ll need to claim this back yourself in your self-assessment tax return. 

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%.

You can save as much as you like into a pension each year, but there is a limit on the amount that will get tax relief - 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. 

What type of pension can you set up?

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. 

Personal pension

A personal pension is a type of defined contribution pension and involves you paying in a set amount each month to your chosen provider. 

Your best bet to find the right provider to suit your needs is by taking financial advice.

You choose where you want contributions to be invested from a range of funds the provider offers. 

The provider will claim tax relief at the basic rate on your behalf and add it to your pension savings. 

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

Stakeholder pension

These pensions differ from other personal pensions because the charges are usually lower and they are more flexible.

You can purchase a stakeholder pension from pension providers, insurers or high street banks. 

The amount you pay into your stakeholder pension can be as low as £20 per month, and you can pay monthly or weekly.

You don’t even have to pay in regularly – you can contribute a lump sum whenever you want. There’s also no limit to the amount you can pay in.

This flexibility can be particularly useful if you’re self-employed, so you don’t have the pressure of monthly payments.

Self-invested personal pensions (SIPP)

Some people don't want a pension company deciding how their savings are invested - they want to control where their money goes and how it grows. This is where self-invested personal pensions (Sipps) come in.

A Sipp is basically a do-it-yourself pension. You'll be taking on responsibility for choosing and managing your own investments, so you'll need to have the time and confidence to do this. 

Sipps are best suited to savers who have the time and knowledge to pick and monitor their own investments.

Lifetime Isa

Lifetime Isas launched in April 2017, and, if you're under 40, offer an alternative to traditional personal pensions and Sipps.

You can open a lifetime Isa if you're aged between 18 and 40. Any savings you put into it before your 50th birthday will get a 25% bonus from the government. 

Until you hit 50, you can add up to £4,000 a year – and if you did pay in £4,000, you'd get a £1,000 bonus from the government.