How to set up a self-employed pension

Blogs 18 Jul 2022

Wondering how you can save for retirement when you’re working for yourself? Our guide to self-employed pensions covers everything you need to know so you can start saving now.

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Many self-employed people love the flexibility that being your own boss brings. From filing accounts to finding new clients, running a business is time-consuming. However, setting aside money for the future might not be at the top of your list if your income varies from month to month.

Paying into a pension is important because you won’t have an employer to set up a scheme for you. Only 16% of self-employed people contributed to a private pension in 2018, with the average pension pot at retirement in the UK £61,897.

In this guide, pension experts from the Federation of Small Businesses answer your frequently asked questions about self-employed pension plans. We explore what your options are and how you can start saving for your retirement today. 

How does a pension work?

A pension is a long-term savings plan with tax relief, meaning that some of your money that would have been paid in taxes goes into your pension instead. For eligible taxpayers, this tax relief is 20% on your contributions. If you pay a higher rate of tax, you may be able to claim extra tax relief. You’ll need to apply for this via your Self-Assessment or by contacting HMRC. There is also no National Insurance on pension contributions.

If you save through a defined contribution pension scheme, your contributions are invested. Your savings grow throughout your working life and then provide you with an income in retirement. You can usually take up to 25% of your pension savings as a tax-free lump sum.

You can choose how to use the rest of your pension pot when you’re 55 (or 57 from 2028). If you die before 75, your pension is usually passed onto your beneficiaries. This is as a lump sum without tax deductions.

There are different rules depending on where you are in the UK and how much you earn. You can find out more about pension tax relief or talk to our pension experts for advice.

Do you get a pension if you’re self-employed?

Employers are required to sign up for the government’s auto-enrolment scheme. This means that employees have the option of a workplace pension. However, you need to arrange your own plans for the future when you’re self-employed.

What about the State Pension?

You can get the State Pension if you’re self-employed. This relies on you making full National Insurance (NI) contributions. The new flat-rate State Pension for 2022/23 is currently £185.15 per week or £9,627.80 a year. Unless you expect to work until you die, you will most likely need an extra financial safety net.

Not sure how much you’ll need to save? Use a self-employed pension calculator to see how much you need to set aside to reach your long-term goals.

Setting up your self-employed pension

What is the best pension for the self-employed?

Choosing the best self-employed pension plan will depend on your personal circumstances. Money Helper offers free impartial advice. 

Private pensions, sometimes called personal pensions, are one option. They are offered by several providers and managed by large investment companies. The value of this pension will rely on how much you’ve paid in and how the investments perform.

NEST (National Employment Savings Trust) pensions

If you’re looking for something simple and cost-effective, NEST is a favourable option. It’s a government-backed pension scheme. You can enrol if you’re self-employed or a single person director of a company. You can sign up to NEST here.

If you're an employer too, then workplace pension duties apply to you. You may want to sign up for NEST as an employer instead.

How much can I pay into my self-employed pension?

When you’re running your own business, your earnings can often be unpredictable. How much you want to save might change throughout the year. That’s why the flexibility of the NEST scheme can be beneficial for self-employed people.

  • Pay into your pot as often as you’d like, meaning you can contribute in a way that works for you and your finances
  • Contribute as little as £10 at a time – it’s important to remember that this will add up over time
  • Allow others to add to your savings, such as your partner or spouse
  • Pause your contributions at any time and pick back up again at a later date
  • NEST claims basic tax relief for you and adds this to your pot

All your contributions will stay in your pot until your chosen retirement date.

Is there a limit to how much I can save?

There are no restrictions on how much you can save in your NEST pension pot. When deciding how much to contribute, you should be aware of two circumstances where you may pay more tax:

  • the value of your pension pots exceeds the lifetime allowance (currently £1,073,100)
  • your contributions are above the annual allowance (currently £40,000 for the 2022/23 tax year, or £4,000 per year if you’re in receipt of a personal pension in payment)
I contributed to a workplace pension scheme with my previous employer, can I still use this?

If you have a NEST account from a previous job you can continue to contribute as a self-employed person. You may wish to combine any previous plans to make managing your pension easier. Your former employers will be able to tell you who your workplace pension was with. If you’re unsure, you can use the Pension Tracing Service to find the provider’s contact details.

What if I decide to enter employment?

You can continue to use your NEST pension pot if you decide to start working for someone else. You can keep adding to it regardless of your employment status. If your new employer uses NEST, they can contribute to your existing pot.

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