Pensions for Self-Employed Workers

When you’re self-employed, you’re effectively ‘self-pensioned’, because unlike many securely employed workers, you don’t have the luxury of relying on an employer to arrange and contribute towards your pension; you instead have to arrange and be the sole contributor to your own.

And, because your self-employed income can fluctuate and a regular income isn’t always guaranteed, choosing and committing to a self-employed pension plan can seem a little overwhelming.

This reluctance to take out a private pension has been highlighted by the Financial Lives 2020 Survey conducted by the Financial Conduct Authority (FCA) which reveals that a whopping 55% of self-employed workers did not have a pension in accumulation in 2020.

If you’re one of those 55%, below we provide pertinent self-employed pension advice to help assist you with your retirement planning by answering your most frequently asked questions such as “what pension schemes are available for self-employed people?” and “how much should I save?”

Armed with the information in this guide, you can confidently set about choosing and setting up a pension so that you can comfortably look forward to enjoying (and affording!) your precious twilight years.

Do you get a State Pension if you are self-employed in the UK?

Yes, all self-employed workers in the UK are entitled to a State Pension based on their National Insurance Contributions (NICs).

The rate at which you pay NICs falls into two classes:

• Class 2 contributions accumulate at £3.05 a week if you make a profit of £6,515 or more in a tax year.
• Class 4 contributions are charged at 9% if you make a profit between £9,569 and £50,270 in a tax year or 2% on profits over £50,270 in a tax year.

If your profits are less than £6,525, you will have the option not to pay your NICs. However, we strongly recommend that you avoid having any payment gaps in your NICs where possible as you will not then get the full State Pension at your State Pension retirement age.

If you simply can’t afford to pay NICs one year, you can pay voluntary contributions at a later date (usually only within 6 years of a missed payment) to bring your State Pension up to speed, if eligible.

Most self-employed workers can pay their NICs via the Self Assessment process if they submit their Tax Return online.

To be eligible for a State Pension, you will need:

• To have paid at least 10 years’ worth of NICs for entitlement
• To have paid at least 35 years’ worth of NICs to get the full amount you’re entitled to

Click this link to check your State Pension forecast on the government’s website and to find out how your State Pension is calculated (and more besides) click here.

Note: It is strongly recommended by financial experts that you do not solely rely on your State Pension for your retirement income. The current full/new State Pension payment of £179.60 per week (which is £9,339 per year) will probably be insufficient to comfortably live on and that full amount is by no means guaranteed, especially if you ‘contracted out’ of the State Pension.

How do I start a pension if I am self employed?

There is no single/niche type of pension for self-employed workers, but you can easily set up and pay into a personal/private pension, in addition to paying your NICs for entitlement to your State Pension.

A personal pension allows you to choose from a variety of funds in which you want your pension contributions invested.

The three personal pension options you can choose from are:

• an ordinary personal pension (provided by most mainstream providers)
• a stakeholder pension (where charges are capped)
• a self-invested personal pension (more investment choices)

Jump to What is the best type of pension for self-employed workers? below for more information on personal pension options and choices.

Are self-employed pension contributions tax-deductible?

Yes, your self-employed pension contributions are eligible for tax relief up to the annual allowance amount of £40,000 or if you earn less, 100% of your salary. Higher rate taxpayers can additionally claim tax relief on their Tax Return.

Your pension provider will automatically claim tax relief from the government on your behalf.

The pension contribution tax relief is at the current basic rate of 20% so if you pay a contribution of £80, the government would add to that an additional £20 making your gross pension contribution a nicely rounded £100.

How much should I put into my pension if I'm self employed?

John Greer, a financial expert from Quilter says that “whatever age you are, save half of it”.

If you take this advice on board, in the table below, we give examples how much of your salary this percentage contribution could potentially amount to:

Age	Salary %	Income	Yearly Contributions	Monthly Payments
20	10%	£20,000	£2,000	£166
30	15%	£30,000	£4,500	£375
40	20%	£40,000	£8,000	£666

Government research indicates that you will require between 50% and 70% of your regular salary to comfortably retire.

The easiest way to try and gauge how much you should save, based on your salary, age, pension fund and planned retirement age, is by using an online Pension Calculator.

Ultimately, the very best advice we can give to you on how much you should contribute towards your pension is that you pay as much as you can afford and start doing so at the earliest age possible.

What is the best type of pension for the self-employed?

There is ‘no one size fits all’ best personal pension for the self employed and what works best for you will depend on your own individual circumstances.

As mentioned above, you should make sure you pay all your Class 2 or Class 4 National Insurance Contributions to get the best State Pension payout possible.

In addition, to further build up your pension pot, you should take out a private pension. You have three main options to choose from:

1. Standard personal pension

Contributions are invested, typically in stocks and shares, to provide you with a retirement income.

2. Stakeholder personal pension

Very similar to a standard personal pension but with limitations on annual charges, contributions and a smaller choice of investment options. This could be a good option for some self-employed workers with a fluctuating income who want to make low and flexible contributions, as you can stop and start payments at any time. This type of pension will usually give an average return on default investments.

3. Self-invested personal pensions (SIPPS)

Riskier and cheaper than the other types of pensions and only recommended for those with a nose for investment opportunities or who take professional financial advice. You can individually choose all the assets you would like to invest in and to get the best return, you will need to regularly monitor and adjust your investments, as and when necessary.

Is there a government pension scheme for self-employed workers?

Whilst this isn’t a specific government scheme for the self-employed, there is a government scheme self employed workers can now apply to join (that was previously only available to employed workers) called NEST.

NEST stands for ‘National Employment Savings Trust’ and is a not-for-profit corporation initially set up by the Department for Work and Pensions to ensure all employers could afford to provide pensions to their workers.

However, NEST pensions are now available to the self-employed as long as they meet the following criteria:

• you work in a trade, business, profession, office or vocation but you’re not employed by someone else and typically have a Schedule D (HMRC) tax status or
• you’re a single person director of a company that doesn’t employ anyone else
• you're between the ages of 16 and 75
• you ordinarily work in the UK, are paid in British pounds, make NICs and reside in the UK.

You can sign up as a self-employed member on the NEST website.

The best ways for the self-employed to save for retirement

So, to sum up, the best ways to save for your retirement when you’re self-employed are to:

• Regularly pay your National Insurance Contributions.
• Take out an additional personal pension, stakeholder pension or SIPPS and try to contribute a certain percentage of your salary or the maximum amount you can afford to pay to top up your pension pot.
• Start up a pension as young as possible.
• Consider applying for a NEST pension.
• Avoid releasing any pension funds before the age of 55.

Ultimately, if you reach State Pension Age and have an insufficient income to live off, you can try applying for Pension Credit. Check out our blog: What is pension credit and how does it work for more info.