What are the best pension options for the self-employed?

If you’re self-employed, saving for retirement can be more of a challenge due to inconsistent income and no employer contributions.

However, the earlier you start thinking about your pension and investing for your future retirement, the better.

Even a small monthly contribution can grow to a sizeable amount as the years progress.

There are approximately 4.28 million self-employed people in the UK, accounting for 15% of the workforce.

Yet it’s estimated that more than half are not actively saving into a pension fund. Don’t be one of those left behind.

Do I need a pension if I’m self-employed?

When someone employs you, your employer must by law enroll you in a workplace pension.

Auto-enrolment means that every month a percentage of your pay (at least 5%) will be automatically put into the pension scheme. Your employer must also contribute at least 3% of your salary, and may choose to offer more. 

However, when you’re self-employed the onus is on you to make provision for your retirement. But why should you invest in a pension, and not something else?

Other options are available (such as a Lifetime ISA, property etc.) but a pension offers some unique tax benefits that makes it generally the best vehicle for retirement saving.

Will the State Pension alone be enough for me to retire on?  

Although self-employed people are eligible for the state pension, the maximum amount you will get is only £221.20 a week (for the 2024/25 tax year).

This rises every year in line with the highest out of inflation, average earnings of 2.5%, but is unlikely to be enough to live on comfortably.

The state pension age is also rising. Currently, it is 66 years old, but in future decades, it is likely to be higher.

By contrast, you can currently access a private pension from the age of 55 (though this is rising to 57 by 2028).

To qualify for the state pension, you'll also need at least 10 qualifying years of national insurance contributions or credits.

What are the best types of pensions for self-employed people?

If you are self-employed, there are a number of different types of personal pensions you can choose from.

Personal/Private pension

A personal pension is a type of defined contribution pension. They are also known as ‘money purchase’ pensions.

The money you contribute to a personal pension is invested in a wide range of assets and funds, just like a workplace pension. You can have a personal pension whether or not you work, and other people can contribute to it.

Self-Invested Personal Pension (SIPP)

A SIPP is a type of personal pension (see above) that lets you choose the investments that make up the fund.

Unlike other personal pensions (such as stakeholder pensions) you have a wider range of options to choose from, as well as more flexibility when investing. 

National Employment Savings Trust (Nest) 

This is a workplace pension scheme set up by the government.

Many employers opt for Nest to help their employees build a pension, but self-employed people can also use the scheme instead of setting up a personal pension.

Note that Nest is not the same as the state pension. Although it is a government-backed workplace pension scheme, the money comes from contributions made by workers and employers, not from taxpayers.

Lifetime ISA (LISA)

LISAs are not pensions – that’s the first point to note. However, they appear superficially similar to a pension because they are designed to help you save for your first home or retirement.

For every £4 you pay in, the government adds £1. You can pay in a maximum of £4,000 a year for a £1,000 bonus, which is added at the end of the tax year.

The upside is that the money is already yours, so won’t be taxed when you draw it out.

The downside is that you can’t save nearly as much as you can compared to a pension, and you may be charged a 25% withdrawal charge if you make an unauthorised withdrawal.

Having both a LISA and a pension can be a good compromise.

Which self-employed pension plan is best for me?

As you can see, there are several different types of pension plans, offered by many different providers.

To help find a pension that’s right for you, it’s worth taking these factors into account:

Flexibility

As a self-employed person, you may have fluctuating earnings. If so, you could opt for a pension plan where you don’t have to commit to a set amount each month.

A good option here is something called a stakeholder pension, which is a type of personal pension that offers low and flexible contributions.

Choice

Some pensions offer more investment choices than others, giving you more ways of growing your money.

One to consider here is a SIPP because it not only provides flexibility in the amount you contribute, but you also have more investment choices at your disposal.

At the same time, it’s important to take into account that making investment decisions without accurate advice may lead to significant losses, so it’s important to know what you are doing before you decide to invest in this type of pension.

Charges

It’s also important to take into account the charges you will be required to pay your chosen pension provider.

Although all pension funds involve management fees, SIPPs often charge lower fees than other types of pension because they are largely self-administered.

Another good option is a stakeholder pension that caps the maximum charge at 1.5% a year of the value of your pension pot in the first 10 years, then 1% a year.

Convenience

Another factor to consider is convenience, especially if you have moved from being employed with a workplace pension to self-employed and vice versa.

A good option here is a Nest pension, which allows you keep your existing Nest pension if you move from being self-employed to employed.

You can also continue contributing through your new employer if they are registered with Nest.

What tax relief do I get on a self-employed pension?

When you contribute to a personal pension, you automatically get tax relief of 20%.

If you’re a higher-rate or additional-rate taxpayer, you can claim additional tax relief via your self-assessment tax return or by contacting HMRC.

How much should I contribute to my self-employed pension?

The amount you should be contributing depends on two things: the amount you can afford, and how much you ideally want to retire with.

If you are still young, you can get away with contributing smaller amounts, but if you start saving later on in your career then you’ll need to put a little more in each month to ensure you have enough to retire with later down the line.

Use our pension calculator to see what a good contribution level looks like.

Get expert financial advice

Planning for retirement as a self-employed individual may seem daunting, but the variety of pension options available can help secure your financial future.

By carefully considering factors such as flexibility, investment choices, charges, and convenience, you can find the right pension plan to fit your needs.

Remember, the key to a comfortable retirement is taking proactive steps now to ensure you’re well-prepared for the years ahead.

Unbiased can match you with a financial adviser for expert financial advice on choosing the best pension plan to secure your financial future.