Pensions for self-employed individuals

Find out how paying into a private pension is a great way to save for retirement if you are self-employed.

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Choosing to be your own boss has many upsides. These include flexibility over when, where and how you work, being accountable only to yourself and the variety of working for multiple clients. But with these benefits come risk, responsibility and heaps of financial admin. One of the most important tasks on your financial checklist should be setting up a self-employed pension.

Here’s how self-employed pensions work and why the tax breaks make pensions the best way to save for retirement.

What is a self-employed pension?

A self-employed pension is a private (or personal) pension taken out by someone who is self-employed. While some pension providers may focus on self-employed people in their marketing, there are no specific pensions solely for people that work for themselves. However, self-employed people may be more likely to take out a personal pension than someone who is employed and already enrolled in a workplace pension.

Best pension for self-employed: Penfold

Penfold SIPP
Finder rating
We chose Penfold as our top pick for self-employed pensions because:
  • No minimum deposit required.
  • Ready made portfolios to choose from including ones that automatically rebalance and ethical choices.
  • No charge to transfer or consolidate your pension.

Need to know: Penfold pension does not allow you to choose each individual investment for your pension.

Read our review of Penfold.

How are self-employed pensions different to workplace pensions?

There are a few key differences between workplace pensions and pensions for the self-employed.

  1. Choice of pension scheme. If you’re employed, you’ll be automatically enrolled into a pension scheme that your employer has selected. Unless you opt out entirely, of course. Self-employed people can choose which pension scheme they use.
  2. Employer contributions. If you’re enrolled in a workplace scheme, both you and your employer will contribute to your pension. If you’re self-employed, you’ll rely on your own contributions.
  3. Type of pension. Self-employed pensions are always private, defined contribution pensions. With these pensions, the value of your pension when you retire will depend on the amount you pay in and the performance of your pension investments. Many workplace pensions are also defined contribution pensions. However, some employers offer defined benefit pensions where you get a guaranteed income for life based on a proportion of your salary.
  4. How much you pay in. With workplace pensions, the amount you need to contribute will be set by your employer as a percentage of your salary (5% is typical). If you’re self-employed, you can choose how much and how often you pay in to a scheme.

Do self-employed people qualify for the state pension?

Yes. Provided that they have made sufficient National Insurance contributions, self-employed people are entitled to the state pension in the same way as anyone else.

How much do I need to pay into a self-employed pension?

There’s no fixed amount you can or need to pay into a self-employed pension. It’s entirely up to you, depending on how much you can afford and how much you want to have in your pension pot when you retire.

Most private pension schemes let you make contributions on a regular, monthly basis and/or pay in less regular lump sums. Check the terms of a scheme before you join to be sure, though. This is important if your income is variable. Some but not all pension providers may have minimum monthly or annual contribution levels, so check this too.

Is it worth paying into a pension if I’m self-employed?

Zoe Stabler

Finder expert Zoe Stabler answers

The simple answer is yes. In most cases, it’s well worth it. Frankly, the state pension is unlikely to be enough for most of us to live comfortably on when we retire. Plus, you won’t start getting it until your mid to late 60s, depending on your age now. If you want to retire sooner than this or want to receive more than the maximum new state pension income (just over £9,350 a year as of 2021/2022), a personal pension is the best way to save if you’re self-employed.

That’s largely because of the tax breaks available. As with all private pensions, you get a little top up from the government when you pay into a self-employed pension scheme. If you’re a basic-rate (20%) taxpayer this comes in the form of tax relief added to your pot every time you make a contribution. So you’ll only pay £80 of every £100 that goes into your pension pot. If you’re a higher-rate taxpayer, the extra relief won’t be added to your pension pot but you can claim it back on your annual tax return.

Of course, if you’re self-employed, cash flow is often unpredictable. This means paying into a pension may not be as straightforward as you might like. But bear in mind that personal pensions usually don’t require regular monthly payments and many don’t have minimum annual contributions. So even if you can only afford to pay in every now and then, it’s still worth setting up a pension scheme. That way it’ll be ready for you when you do have some cash to spare.

What types of pension scheme can I join if I’m self-employed?

There are 3 main types of personal pension schemes that self-employed people can join. All of them are defined contribution schemes, where your contributions are invested and the value of your pot will depend on investment performance. Some give you more control over your investments than others. The best option for you depends on your circumstances, how much time (or inclination) you have to proactively manage your pension investments and your investment experience.

  • Standard personal pensions. With these schemes, you can choose the type of investment strategy for your pension pot. For example, high versus low-risk or a focus on ethical investments. This strategy is then applied and managed by the pension provider. You don’t have direct control over exactly where your money is invested. Most large pension providers and some newer challengers, including digital-only providers, offer standard personal pensions.
  • Stakeholder pensions. These are similar to standard pensions, but investment options may be more limited. However, there are strict government rules about how they’re managed, which may appeal to some. Annual management charges are capped, they allow low minimum contributions and you can stop and start payments and transfer out at no cost.
  • Self-invested personal pensions (SIPPs). With SIPPs, you choose which specific investments you put money into and actively manage those investments. These tend to be better for more experienced investors who make larger contributions and/or have a larger pot. SIPPs often have higher investment charges than other types of schemes.

Can self-employed people use NEST?

The National Employment Savings Trust (NEST) was set up when the government introduced pension auto-enrolment to ensure all employers have access to a high-quality workplace pension scheme. Auto-enrolment requires all employers to sign up the majority of staff to a pension scheme automatically. Employers must usually also make contributions on the employee’s behalf.

While it’s primarily used for workplace pensions, self-employed people can usually also join NEST. You can contribute as much or as little as you like at a frequency of your choosing.

If you’re self-employed but you employ other people, this makes you an employer. If so, you’ll also need to set up a pension scheme to enroll them into. This can be through NEST or another scheme.

Can I have a workplace pension and a self-employed pension?

Yes. For example, you may be employed part-time and self-employed the rest of the time. If so, you may already be a member of your employer’s workplace pension. If you need to choose either a workplace or a self-employed pension to pay into, it’s better to opt for the workplace pension as you’ll also benefit from employer contributions. But if your workplace pension doesn’t allow you to save as much as you would like towards retirement, you can also take out a self-employed personal pension.

What should I think about when choosing a self-employed pension?

With workplace pensions, your employer dictates the scheme that you join. The choice is yours if you’re self-employed. It’s important to make the right choice. Think about the following points:

  • Contribution requirements. If your income is volatile (perhaps you make more on some years than others), you might want to opt for a provider with no minimum contribution requirements. This allows you to make bigger contributions in profitable years and less or no contributions in years when money is tighter.
  • Investment plans available. Providers have different types of pension investment plans. These allow you to set the broad investment approach. For example, you may want to focus on ethical investments.
  • Your desired level of investment control. If you want a broader range of investment opportunities or want to manage your specific investments yourself, then you may want to choose a SIPP.
  • Fees and charges. Like almost all financial services, pensions come with costs. These aren’t always easy to compare as different providers charge in different ways. But it’s worth putting the effort as high fees eat into the ultimate value of your pension pot. Check too for any exit fees in case you eventually want to transfer your pension pot to another scheme.
  • Options for managing your pension. Check whether you can manage your pension by phone, post or digitally depending on your preferences. Some pension providers also have an app. This isn’t essential, but might be handy if you want to keep a close eye on your pension investments (more likely if you have a SIPP).

How much do self-employed pensions cost?

The amount you’ll pay for your pension scheme varies between providers. Personal pensions tend to have higher charges than workplace pensions. That’s because employers tend to negotiate lower rates with pension providers.

It’s still worth comparing charges for personal pension schemes carefully. They can vary considerably. One of the most common charges is an annual management or service charge. This may be applied as either a flat fee, a percentage or a combination. Even a seemingly small variation (the difference between 0.8% and 1%, for example) can make a big difference over time in the eventual value of your pension pot. For example, a 0.2% charge on a £100,000 pot is £200. Add that up over 20 years (ignoring, for now, the likely capital growth, variations in performance and any other charges) and you’ll pay £4,000 more with an annual management charge of 1% than with a 0.8% charge.

Other fees you might incur include contribution charges (often a percentage of the amount you pay in), transaction costs for when investments are bought and sold and exit fees if you transfer your pension to a new provider.

Compare self-employed pension providers

Name Product Brand description Min investment Min monthly investment Number of funds Transfer available Offer Link
Interactive Investor SIPP
Get £200 cashback when you open a SIPP. Offer ends 30 April. Capital at risk. T&Cs apply. Min £15k investment. New customers only.

Capital at risk

Platform details
Nutmeg Pension

Capital at risk

Platform details
Hargreaves Lansdown SIPP
Hargreaves Lansdown is the UK's biggest wealth manager. It's got three different retirement options. Capital at risk.

Capital at risk

Platform details
Wealthify Pension
10 Portfolios

Capital at risk

Platform details
Penfold SIPP
4 Portfolios
Bonus of up to £1000 for your pension when tranferring to Penfold

Capital at risk

Platform details
Moneyfarm SIPP
Moneyfarm has pensions that are matched against your risk appetite, goals and planned retirement date. Capital at risk.

Capital at risk

Platform details
AJ Bell has two different pension options, a self managed pension and one that is managed for you. Capital at risk.

Capital at risk

Platform details
PensionBee Pension
Pension Bee is a newbie in the pension market. It helps consolidate your pension plans into one place. Capital at risk.

Capital at risk

Platform details
Profile Pensions

Capital at risk

Platform details
Saxo Markets SIPP
Saxo Markets gives flexibility and control over your investment strategy. Capital at risk.

Capital at risk

Platform details

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

How do I open a self-employed pension?

To open a self-employed personal pension you can either:

  • Compare providers yourself then go directly to your chosen provider.
  • Use a regulated financial adviser to compare options on your behalf and make a recommendation. They may also be able to open and manage the scheme for you.

When can I collect my self-employed pension?

You can start accessing the money in a personal pension from the age of 55. You can only access it before this under unusual circumstances, such as if you need to retire early due to serious ill health. From the age of 55, it’s up to you when you first access your pension and how much you take. You don’t have to have stopped working to start taking money from your pension.

How can I withdraw money from a self-employed pension?

Once you reach the age of 55, you can choose to take out 25% of your total pension pot (including any self-employed pensions) as a tax-free lump sum.

Any other withdrawals are liable for income tax. You have a few options. You can use just 1 of these or take a mix-and-match approach.

  • Buy a guaranteed income for a fixed term or for life, known as an annuity.
  • Leave most of your money invested, using it to draw a regular income. This is known as pension drawdown.
  • Take the whole lot out in 1 go. This is typically only likely to be a good option if your SIPP pot is relatively small and you have other ways to fund your retirement, not least because you’ll be taxed on the amount that exceeds 25%.
  • Take a number of smaller lump sums. In this case, rather than getting 25% of the full amount tax-free at the outset, you’ll receive the first 25% of each lump sum withdrawal tax-free.

What happens to my self-employed pension when I die?

If you die before you’ve withdrawn any or all of your pension pot, you can leave what’s left to your beneficiaries. How they can receive it (for example, as a lump sum or a regular income) depends on whether you’ve already accessed the money in your pot and how you’re taking it. Check the terms of your scheme. If you die before the age of 75, the recipients usually won’t pay any tax on your pension money. If you die after the age of 75, they’ll pay tax on pension money taken as income at their usual rate of income tax.

Bottom line

Unless you love your work enough to keep doing it until the day you snuff it, you’ll need to have financial plans in place to secure a decent retirement income. If you’re self-employed, you may not have the benefit of your employer paying into your pension. But the tax relief on self-employed personal pension contributions still makes this one of the best ways to save for later life.

Frequently asked questions

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