10 MIN READ
Self-employed pensions
There’s a lot of freedom that comes hand in hand with being self-employed. Being your own boss means that you get to make the rules when it comes to when, where and how you choose to work. With that freedom, however, comes certain responsibilities that fall squarely on you. And often it’s the type of things that would typically be handled by your employer, if you had one.
So, when it comes to arranging your self-employed pension, it’ll likely come as no surprise that the responsibility lies with you. And while it can be all too easy to get caught up in the excitement of the day-to-day running of your business, it’s important to take time to think about the future and consider your pension options. Whether it’s finding out if you’re entitled to a state pension, choosing which type of personal pension plan you’d like to use, or finding out about potential entitlements - it’s down to you to take action.
So where to start?
What is a pension in the UK?
When people talk about their pension in the UK, they’re usually referring to the plan or scheme that they pay into to save for their future to use during retirement. How your pension works depends on what type it is. Those employed by an employer tend to have workplace pensions, whereas those who are self-employed usually have a personal pension.
What is a workplace pension?
Workplace pensions are a means of saving for retirement typically arranged by the employer, which automatically takes a percent of the employee’s wage each month. Workplaces are now required to provide their staff with a pension plan or scheme and are obligated to make payment contributions to the pensions of eligible workers.
Why is it important for self-employed people to have a pension?
Generally, when you work for an employer or company your pension plan is handled by them, without you having to deal with the nitty gritty of it. This would usually happen during onboarding during which time you would be entered into the workplace pension scheme as a member. From there, you may be expected to confirm your details such as your name and address, and national insurance number. Other than that, your employer and the pension provider would pretty much take care of the finer details.
However, as a self-employed person, the responsibility to manage a pension plan, and potentially fund, is on you. As you don’t have an employer to contribute to or manage your pension, unlike employed people, no one will get in touch to do this for you. The downside to having a self-employed pension is that you don’t have an employer to make contributions towards your pension.
Can I set up a pension for myself being self-employed?
In short, yes. You are responsible for choosing which pension scheme will best suit your needs and wants. Self-employed people can set up personal pensions, sometimes referred to as a private pension. These pensions are typically used by individuals, without the help of a workplace or employer.
What types of pensions are there for self-employed people?
When it comes to planning your pension, there’s not a standard pension plan in place that’s available to you as a self-employed person. Unlike workplace pensions that are offered to you, you’ll have to arrange your own pension plans. Many people who are self-employed set up a personal pension.
Personal pensions
With personal pensions, also known as a ‘private pension’, the money that you contribute is put into investments. From there, you’re able to choose how you want your contributions to be invested. For example, you may decide to invest shares with the provider. With this type of plan, you’ll typically receive a pension amount based on the following:
- The amount you’ve paid in
- How much you take out
- How the investments you’ve made perform
Types of personal pensions
Stakeholder pensions
This type of personal pension is subject to specific government regulations and requirements. These include limits on charges. You can find out more here.
Self-invested personal pensions
Also known as SIPPs, this type of personal pension allows you to have control over the investments that make up your pension fund. You can find out more here.
Each pension type has its own pros and cons to consider. And what works for some self-employed people won’t necessarily work for others. If you’re struggling to decide which scheme best suits you, it may an idea to get some financial advice from a professional. They’ll be able to review your circumstances and make recommendations based on your individual needs.
How do I set up a private pension?
If you’re interested in setting up a private pension, it’s a good idea to explore the different scheme types available to you before you make a decision. Once you’ve decided on which provider to go with, you should contact your chosen pension provider or investment provider and select the type of plan that works for you. From there, you will arrange the frequency of payment, and payment amounts.
What are the benefits of having a pension?
Whether you work for yourself or someone else, there’ll come a point when you’ll be looking to stop working and considering retiring. Having a pension ensures that when that time comes, you’ll have the financial stability to manage without an income. And the more savings you have, the more financially comfortable you’ll be during retirement.
As a self-employed person, it’s up to you to decide when you want to stop working – essentially, you can retire any time you want. However, the type of lifestyle you’ll be able to enjoy during retirement will come down to how much savings you’ve managed to accrue over time.
How much pension should I pay?
When it comes to making payments towards your pension, it’s entirely up to you how much you choose to pay each month. However, keep in mind that there’s a limit on the amount that you’ll receive tax relief on. Known as ‘annual allowance’, this is the maximum amount of savings in your pension that will be eligible for relief each tax year.
Don’t worry about having to arrange this on your end, as the pension provider you chose to go with is able to automatically claim the tax relief on your behalf. You may have also heard of this as being referred to as ‘tax relief at source’.
Does paying into a pension reduce tax for self-employed
As mentioned above, when it comes to paying into a pension, one significant benefit is tax relief. This comes into play when you start making contributions into your pension, with money that would have gone to the government instead going into your pension. The amount of tax relief is dependent on the tax income you pay, and the set limit of tax relief that you can receive per year.
Can I use the carry forward rule while self-employed?
This rule allows you to make the most of your savings by using up any previously unused tax allowance by ‘carrying it forward’.
Being self-employed you’re able to take advantage of the carry forward rule by using any unused tax allowance from previous years. You’re able carry this forward, going back as far as three annual tax years.
In the UK, each working person is entitled to the same annual allowance when it comes to tax free contributions to their pension. If you’re unsure if this applies to you, gov.uk provides a breakdown here.
Please note, tax benefits may vary depending on your own situation.
How to build a pension while self-employed
Building your pension when you’re self-employed can be tricky at times, as you can’t always guarantee that you’ll have a set amount of income each month. There’ll be times when business is booming, and periods when it’s considerably quieter. However, there are tools you can use and healthy habits you can build to help:
Free online tools like pension calculators can help you work out:
- How much you’ll need for retirement and forecast how much you’re likely to have based on your savings
- A specific target to aim for
- View how changing your contribution amount will impact your overall pension amount
- State pension contributions (if eligible)
Get into the habit of frequently reviewing your pension to assess the amount you’ve saved so far and determine if it’s possible to up your contributions. Why not use a retirement planner to keep track of your progress? That way you can set any aims or targets you want to meet and keep yourself accountable.
Set small goals and milestones to keep you motivated to save. Set a minimum save amount that you’d like to put by weekly or monthly towards your pension.
Do I get a State Pension if I’m self-employed in the UK?
As a self-employed person, the way in which you’re assessed for eligibility for a State Pension is the same way as those in employment. You’ll be judged in terms of meeting the set criteria to qualify, which is:
- Having at least ten qualifying years on your National Insurance record to be eligible for any State Pension
- Having at least 35 qualifying years to receive a full State Pension
Once you reach retirement age, you’re able to access your State Pension, given that you meet the above criteria to qualify. As you need 35 years of national insurance contributions, it’s a good idea to continue to pay this regardless of whether or not you’re self-employed or in employment under someone else.
Will my State Pension be reduced if I have a private pension?
While you’re self-employed, any money you make or savings you manage to put by will not impact your entitlement to receiving State Pension. Receiving state pension is dependent on your meeting the criteria to qualify.
Navigating the world of self-employment can be tricky at times, especially when it comes to understand your rights and entitlements. To help, we’ve put together some handy guides on Maternity Pay for self-employed and sick pay.
Plan for tomorrow, today
As you know, when you’re self-employed there may be times when the performance of your business impacts your own finances, and unlike working in employment, you can’t predict and guarantee a set amount of income.
It might be a good idea to start thinking about what retirement looks like for you. From there you can start to consider the level of savings you’ll need to have as a self-employed pension to make it happen. Prepare today for what’s to come later in life. Future You will thank you.
All links are checked and valid at time of publishing, 12 Sep 2024.