Self-employed pensions: everything you need to know

Self-employed pension saving has dropped to record lows, leaving many at risk of poverty in retirement. Latest available stats show that people who were self-employed paid £830 million into pensions during 2019/20, according to HM Revenue & Customs (HMRC), down from more than £1 billion the year before. 

This contrasts with the success of auto-enrolment in boosting pension saving by employees. If you are employed, you don’t have to actually do anything. Once you earn more than £10,000 a year, your employer is legally required to sign you up for a pension scheme and add money to it, unless you opt out.

But if you are self-employed, then arranging a pension is all up to you.

Self-employed pensions: why is it important to save?

When you are self-employed, the entire responsibility for running your business falls on your shoulders – and that includes pensions. If you don’t set aside money for your retirement, you may never be able to afford to stop working. 

Prioritising the future can be hard when you are juggling immediate demands, or money is tight. Perhaps you intend to sell your business to fund retirement. 

But as Becky O’Connor from Interactive Investor said: “Not all businesses succeed over the very long term. You might also not get the sum you want for a business. So relying on a business sale for retirement proceeds is a risky strategy.”

The earlier you start a self-employed pension, the more time your money will have to grow towards a comfortable retirement.

Is it worth saving into a pension if you are self-employed?

The big advantage of pensions is the free money added in tax relief. If you are self-employed, you won’t get any contributions from an employer, but you can still nab top ups from the government. 

Maike Currie, head of personal finance at Fidelity International, said: “The government will give you a basic rate of 20% tax relief on anything paid into your pension up to the lower of 100% of your earnings or your annual allowance, which is £40,000 for most people.  If you are a higher rate taxpayer, you can claim additional tax relief.”

Even if you don’t earn enough to pay tax, you can still put up to £2,880 a year into a pension, and get up to £720 added by the taxman.

If you are a company director, you can make pension contributions from your business, which reduces your corporation tax bill. Plus, any money inside a pension grows free from income tax and capital gains tax.

However, you can’t take money out of a pension before the age of 55 - rising to 57 from 2028 - and only the first 25% can be withdrawn tax-free. 

What is the best pension for the self-employed?

There’s no lack of choice when it comes to pensions for self-employed people, whether you want to manage your own money or have someone do it for you.

When selecting a pension, Lisa Conway-Hughes, from Westminster Wealth Management said: “Look at the combination of costs, what investments are available to you and also the online functionality of the plan. If you don’t feel confident picking the investments yourself just yet, check the provider’s website to see if they offer tailor-made solutions for you.”

National Employment Savings Trust (Nest)

Nest is the pension scheme set up by the government to support the auto-enrolment scheme, but you can also use it if you are self-employed or the sole director of a company that doesn’t employ anyone else. Over 99% of Nest members use retirement date funds, where your money is managed based on when you plan to retire.

You can contribute as often or as little as you like, provided you pay in at least £10 each time. 

Unusually, Nest takes 1.8% of each new contribution, but it does have a low annual management charge of 0.3% of your total fund.

Online pension providers

The new breed of pension websites and apps let you open a pension with as little as £1, with simple fees and a limited choice of ready-made investment plans. 

You have the flexibility to pay in as much as you want, whenever you want – although Penfold asks for minimum contributions of at least £10 once the pension is open. 

Annual fees depend on the plan chosen, ranging from 0.5% to 0.95% for PensionBee, 0.75% to 0.79% for Raindrop and 0.75% to 0.88% for Penfold. Fees are lower for balances over £100,000.

Digital wealth managers

Several of the new ‘roboadvisers’ such as Wealthify and Nutmeg also offer pensions, with similar flexibility, simplicity and limited choice to the pension apps targeted at the self-employed.

You can open a Wealthify pension from just £1, but Nutmeg requires at least £500. Afterwards, there’s no minimum contribution for either. 

Again, annual charges vary depending on the plan you choose, ranging from 0.72% to 1.14% for Nutmeg, with lower charges on balances over £100,000, and from 0.76% to 1.3% for Wealthify.

Investment platforms

With an investment platform, you take control of how your money is invested through a self-invested personal pension (SIPP).

Fees can be far more complicated, including extra charges for buying and selling investments as well as for withdrawals.

One of your main choices will be between a platform that charges a percentage of your balance each year, which can be cheaper for small balances, or a flat fee. 

SIPP fees start from 0.25% at AJ Bell, 0.35% at Fidelity, 0.45% at Hargreaves Lansdown, and from £12.99 a month at Interactive Investor, but you’ll need to add the costs for any funds you use on top. Vanguard charges just 0.15% a year for its SIPP, but only offers Vanguard investments. 

The minimums for regular investing range from £25 a month at Hargreaves Lansdown, Fidelity, AJ Bell and Interactive Investor to £100 a month at Vanguard.

Traditional pension providers

You can also set up a stakeholder pension or SIPP with a traditional pension provider such as Aviva, Legal & General or Standard Life. 

The small print and charges for SIPPs vary a lot, but charges for stakeholder pensions are capped at 1.5% a year for the first 10 years, and 1% a year afterwards.

Alternatives to a pension

If you are under 40 and concerned about locking money away in a pension, you might consider a Lifetime ISA (LISA) instead.

Money in a LISA is only meant to be used for buying your first home or after the age of 60 for retirement money, but you can make other withdrawals if you are willing to pay a 25% penalty. Otherwise LISA withdrawals are completely tax-free. 

Investment LISAs are offered by companies including Hargreaves Lansdown, AJ Bell, Moneybox and Nutmeg for example.

Where can the self-employed go for help?

If you want more assistance with pensions, then check out the government’s Money Helper site. 

If you are over 50, you can book a free appointment for general pension guidance with Pension Wise. However, if you want personal advice, you will need to pay for it. Visit Unbiased or VouchedFor to find an independent financial advisor nearby.