Many people in their fifties and sixties decide to work for themselves, often because they want to work flexibly, or to pursue a particular passion.

However, being self-employed can be really tough – and even more so during these challenging times – so it’s not surprising pensions often fall to the bottom of the to-do list.

Most people who are employed are automatically enrolled into a workplace pension, but if you’re self-employed, it’s up to you to make your own retirement provision. That can be easier said than done when you’re busy trying to get your business off the ground.

Around 4.24m people in the UK are self-employed, according to the latest data from the Office for National Statistics (ONS) and nearly one in two (48%) self-employed people in the UK are aged over 50. According to recent research by insurer NFU Mutual, which questioned more than 2,000 people about pensions, more than three quarters of self-employed respondents said they do not pay into a pension.

Separate research by Nest, the workplace pension scheme set up by the government, found that 74% of self-employed people think it’s important to save for retirement, but 50% aren’t confident about how they’ll do this.

This may be because self-employed incomes often vary from month to month, so committing to paying in a set amount each month may feel daunting, or because it can be difficult to know which pension to choose if you’re not simply using your employer’s default option.

Here, we explore the different pension options available to you if you’re self-employed

Why pensions for the self-employed matter

Although you won’t get the benefit of employer contributions if you’re self-employed, the tax breaks on offer still make pensions a great way to save.

The taxman boosts the amount you pay into your pension. For example, if you’re a basic rate taxpayer a £100 contribution into your pension will only cost you £80 thanks to government tax relief. If you’re a higher or additional rate taxpayer the same contribution will only set you back £60 or £55. Find out more in our guide How pension tax relief works. 

Even though it might be a stretch to pay into a pension, it’s important to remember that the State Pension alone is unlikely to provide you with a comfortable retirement. The current State Pension is £203.85 per week in the 2023/24 tax year, and with the age at which you can claim it gradually being pushed back, it’s definitely a good idea to have your own retirement savings in place too.

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If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified local advisor give an unbiased assessment of your retirement savings.

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Self-employed pension: It's never too late to start

If you’re in your fifties or sixties and planning to retire in the next few years, you might think you haven’t got enough time to build up a decent pension pot, but saving for your future is a good idea at every stage of life. Your contributions will still qualify for tax relief and as you’ll be closer to taking your pension, the tax benefits can appear even more attractive. This is because the tax relief stays the same, but you can access the money you put in much sooner than someone in their twenties can.

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

There’s a wide range of pensions to choose from if you’re self-employed, so one of the best ways to narrow down your options is by identifying the type of pension that might suit you.

Previous employer pensions

If you belonged to a workplace pension scheme before you became self-employed, you may be able to carry on contributing to your workplace pension. You’ll need to check with the scheme provider to see if this will be possible.

Personal pensions

When you pay into a personal pension your money is invested, and the amount you end up with when you retire depends on how much you’ve paid in and how your investments have performed, once any charges have been deducted.

It’ll be up to you to choose the type of funds where your retirement savings are invested, so you’ll need to think carefully about how much risk you’re prepared to accept. Pension providers will make it clear which investments are likely to suit those with a strong appetite for risk and which will be more appropriate for those who are more cautious. As a general rule, the nearer you are to retirement, the lower risk the investments you opt for should be, to help reduce the impact of any stock market setbacks just before you stop work

Stakeholder pensions

A stakeholder pension is a type of personal pension that allows you to make small contributions, so may be a good option if you can’t afford to put away a large amount each month.

They are often flexible, so you may be able to stop and start your contributions when you need to. This could come in handy if you’re just getting your company off the ground and you can’t commit to paying a set amount each month. Charges are capped on stakeholder pensions and they usually offer a default investment fund so you don’t have to decide where your money goes.

Self-invested personal pensions (SIPPs)

A SIPP is essentially a ‘DIY’ pension, where you choose exactly where your money is going to be invested. SIPPs usually offer a wider choice of investments than other types of personal pension. For example, whereas you’ll typically be given a range of funds to choose from in a personal pension, with a SIPP you’d normally be able to choose individual companies to invest in, as well as a wider range of funds and more sophisticated alternative investments.

This type of pension typically suits people who are comfortable managing their finances and who are experienced investors. There are two main types of SIPP, low cost SIPPs, sometimes known as ‘lite’ SIPPs, and full SIPPs. Low cost SIPPs can often be started with a minimum investment of around £5,000 and you may be able to pick from a range of ready-made portfolios if you don’t want to have to pick investments yourself. You can learn more about how SIPPs work in our article Everything you need to know about SIPPs.

Full SIPPs usually have steeper charges than low cost SIPPs, mainly because they provide access to a wider range of investments. According to consumer association Which? full SIPPs are only really suitable for those with commercial interests or large pension funds, and the typical sum invested in this type of SIPP is usually between £150,000 and £450,000.

If you’re not an experienced investor, a stakeholder or personal pension may be a better option than a SIPP.

How much should the self-employed put into a pension?

A good rule of thumb to help you decide how much you need to retire is to take your age, halve it, and then contribute this percentage of your salary to your pension every month for the rest of your working life.

If, for example, you’re 50, you should aim to save at least 25% of your salary before it’s taxed every month until you retire. That means if you’re earning £2,000 a month, you should ideally pay £500 of this a month into your pension (25% of £2,000). You can learn more in our article How much should I save for retirement?

You can use the Rest Less pension calculator to see a forecast of the pension income you’re likely to get when you retire, based on the current value of your retirement savings. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. You can amend your retirement age and the level of income you want as well, to see how these affect the length of time your pension will last. You can find out more about how much you might want as a retirement income in our article Can you afford to retire?

If you’re planning to increase the amount you save, remember that there are limits on the amount you can pay into your pension and still benefit from tax relief. You can get tax relief on contributions up to an annual allowance of £60,000 or your annual earnings, whichever is lower. Read more about the different annual and lifetime pension allowances here.

What's the best pension for the self-employed?

If you’re self-employed, the best pension for you will depend on your personal circumstances and how much control you want to have over your pension investments. For example, if you’re an experienced investor or you want plenty of investment choices, a self-invested personal pension (SIPP) or personal pension could be the best option for you. However, if you want to save into a pension but don’t want to have to choose its underlying investments, a provider offering a few ready-made portfolios or simple fund options could be more suitable.

Where to go for more help

While pensions can appear complicated, you shouldn’t let this put you off saving, as they can be crucial in allowing you to lead the retirement you’ve worked so hard for.

A good financial advisor can help you navigate this complexity by providing specific recommendations based on your individual circumstances, enabling you to maximise your retirement savings.

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.

The consultation is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

The most important thing is to not put off thinking about your pension, and remember it’s never too late to start saving – pension contributions can still benefit from tax relief until you reach the age of 75.

Will I get a full State Pension if I’m self-employed?

The new State Pension applies to those reaching retirement age on or after 6 April 2016 and is £203.85 per week in the current 2023/24 tax year. You’ll only be eligible for this amount if you’ve made 35 ‘qualifying years’ of National Insurance Contributions.

If you’re self-employed, you’ll make Class 2 National Insurance contributions, which for the purposes of your State Pension are treated the same as employee contributions. Class 2 National Insurance contributions are payable if your profits are above a certain amount (£6,725 in 2023/24). You pay both Class 2 and Class 4 National Insurance contributions when your profits rise above £12,570 (in the 2023/24 tax year).

If you don’t have 35 qualifying years of National Insurance contributions, you’ll get an amount based on the number of years you have paid in, unless you’ve got less than 10 years of contributions, in which case you won’t normally qualify for any State Pension. Find out more about the State Pension in our guide How the State Pension works.

If you’re unable to save into a pension

Sadly there are plenty of self-employed people who may not be able to afford to save into a pension, and so won’t have any private pensions to supplement their State Pension when they stop working.

If the State Pension will be your only source of income when you retire, it’s worth seeing whether you might be eligible to claim Pension Credit, a means-tested benefit which you might qualify for if you’ve reached State Pension age and your weekly income is below a certain level. You may be entitled to Pension Credit even if you have savings or own your own home.

Claiming Pension Credit may provide you with access to a range of other benefits such as help with housing costs, council tax or heating bills, so it’s well worth finding out if you qualify. Find out more in our article Pension Credit explained.

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