Pensions for the self-employed
Self-employment brings with it a multitude of benefits: the freedom to set your own hours, the ability to pursue your passions, and the potential for a greater income.
However, one of the most significant challenges faced by the self-employed is planning for retirement. According to the National Federation of Self Employed & Small Businesses, a much smaller proportion of self-employed individuals contribute to private pensions compared to employed workers, with this gap continuing to widen over time. Unlike traditional employees who might benefit from employer-sponsored pension plans, self-employed individuals have the responsibility to navigate their own retirement savings.
This article explores the reasons why saving for a self-employed pension is crucial for financial security in your future, including answers to frequently asked questions such as if self-employed professionals get the state pension and if pension contributions are tax deductible for the self-employed.
Why save for a self-employed pension
Saving for a self-employed pension is an essential part of financial planning for anyone who works for themselves, whether you’re a freelance contractor or the owner of a small business.
Self-employed people are not automatically enrolled in a pension and do not receive employer contributions, a fact that has contributed to retirement challenges for the self-employed. interactive investor’s Second-class retirement: The self-employed experience report revealed that almost two fifths of self-employed people are not contributing towards a pension, with 90% of self-employed people aged 55+ finding themselves off track for a moderately comfortable retirement.
By choosing to save for a self-employed pension, you are able to provide yourself with some financial security, tax benefits, and the opportunity for compounding growth, with the flexibility to choose a pension plan that suits your needs.
Tax benefits
Contributions to a pension plan are often tax-deductible, reducing your taxable income and, consequently, your tax liability. Tech-first pension providers, Penfold, shares how self-employed pension tax relief works out as 25% on top of the amount contributed, if you are a basic-rate taxpayer. This means that for every £100 you contribute, the government adds an extra £25, making your total contribution £125. However, if you pay a higher tax rate of 40% you may be eligible to receive more tax relief, further reducing your tax bill for the year.
Additionally, the growth of your pension investments is typically tax-deferred, allowing your savings to compound more effectively over time.
Financial security
The lack of pension contributions is placing a higher risk on self-employed individuals for financially navigating their later years. An article from the Financial Times revealed how self-employed workers are struggling to build up the savings they need to fund their retirement, with only one in five self-employed professionals contributing more than £10,000 to their pensions yearly. Setting up a self-employed pension and making a personal savings plan for yourself will provide you with a steady income stream, allowing you to maintain your lifestyle and meet your needs with minimal financial stress.
The unpredictable nature of self-employment can sometimes lead to financial instability, but having a pension plan in place can offer a sense of security for your future.
Flexible savings
As a self-employed individual, you have the flexibility to choose whichever type of pension plan best suits your needs and retirement goals, including options such as standard personal pensions, self-invested personal pensions (SIPPs), and stakeholder pensions. This flexibility allows you to tailor your retirement savings strategy to align with your risk limits, investment preferences and retirement plans.
Investment growth
A considerable advantage of saving for a pension is the benefit of compounding growth. The earlier you start saving, the more time your money has to grow, with compounding allowing your investment returns to generate their own returns, leading to growth whilst you continue to work and pay into your pension. This can significantly enhance the value of your pension pot by the time you retire, providing a larger sum for your future.
Self-employed pension options
When you’re self-employed, planning for retirement is just as crucial, if not more so, than for those employed by others. Unlike traditional employees, self-employed individuals do not have access to employer-sponsored retirement plans, however, there are several types of pensions specifically designed for the self-employed to help secure their financial future.
Personal pensions
There are three types of personal pensions: ordinary personal, self-invested personal and stakeholder.
Standard personal pensions
Standard personal pension plans are arrangements where you can choose where and how your funds are invested. These plans offer a wide range of investment options, letting you tailor your pension to your financial goals and the risk level you prefer. MoneyHelper, a service provided by the Money and Pensions Service, shares how these plans are offered by the majority of pension providers.
Self-invested personal pensions
Self-invested personal pensions (SIPPs) are a type of personal pension that allow you to have greater control over your investments. They give you the option to invest in a broader array of assets, including stocks, bonds, and commercial property. According to financial advisors, SJP, SIPPs should only be considered by those who have experience in managing investments and want to take a more hands-on approach with their retirement funds.
Stakeholder pensions
Stakeholder pensions are a good option for those who prefer a low-cost and straightforward pension plan as they are designed to be simple and flexible, with capped charges and minimum contributions. These plans also offer flexibility in terms of contribution levels and frequency, as well as a default investment strategy to help those who would rather not make investment decisions.
NEST pensions
The government NEST (National Employment Savings Trust) pension, in most cases, is available to any self-employed individual or sole director of a company which does not have any other employees. The official NEST website shares how self-employed people will need to set up their own pension NEST accounts, where they will be able to control their contributions, making payments as often as they like, as long a minimum of £10 is contributed each time.
Do self-employed get state pension?
Yes, self-employed individuals are entitled to the new State Pension, as long as they have paid National Insurance for at least ten years before reaching State Pension age. At the time of writing this article, February 2025, the full rate of the new State Pension is £221.20. It is important for the self-employed to stay informed about their National Insurance record to ensure they qualify for the full State Pension.
How much should I save?
As advised by The Times Money Mentor, the general rule of thumb for saving for a self-employed pension is to aim for half of your age as a percentage of your salary. For example, if you are 30 years old, you should be aiming to contribute 15% of your salary before tax towards your pension. Aside from this general rule, you are able to save up to £60,000 or 100% of your total annual income to remain eligible for tax relief on your self-employed pension.
As a self-employed individual, it is essential to carefully plan your pension and to start saving as early as possible. Figure out what your retirement goals and needs are, be consistent with your contributions, and regularly review your pension plans in case of any life or career changes.
Explore Markel Direct’s State of Self-Employment report to read about self-employed professionals in the UK and their biggest challenges. Discover help & guidance for self-employed professionals and tradespeople, or learn more about our small business insurance and trades insurance solutions.
Please note: This article provides guidance for information purposes only. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional. The views expressed by websites referenced to are limited to those of the websites, and do not necessarily reflect the views of Markel Direct.