Should I pay into a private pension as I’m self-employed?

The majority of UK employees on a company’s payroll are placed in a workplace pension scheme. Your employer arranges these schemes, and usually, both you and the employer pay into them. 

But if you’re self-employed, saving into a pension can be more complicated than for people in employment. Choosing a pension scheme is up to you; there are no employer contributions, and your income can fluctuate, making saving trickier.

But there are many upsides to having a pension. So what options are available to the self-employed? Keep reading to find out:

• Different types of pensions 
• Pension options for the self-employed
• How to choose a pension for the self-employed
• Benefits of having a pension
• Tips for managing your pension

1. Private pensions schemes

• Workplace pension: This is usually arranged by your employer, and both you and your employer will pay contributions into the pension scheme. The amount you get depends on the type of scheme your employer offers.

• Personal and stakeholder pensions: This is a private pension that you pay into. Employers can also pay into them as a workplace pension scheme. The amount you get depends on how much is paid in and how well the investment does.

2. State pensions from the government

The state pension is available to anyone who has worked in the UK and paid National Insurance contributions. You’ll get a weekly payment from the government when you reach retirement age. 

To be eligible for the state pension, you must meet specific criteria. For example, you must have paid your National Insurance contributions for a minimum of 10 years.

You must also be at least 66 years old, and the minimum age will rise to 67 by 2028. 

The amount you receive depends on your circumstances and when you qualified for the state pension. The basic state pension is £137.60 a week in 2021-22. This applies to people who reached state pension age before 6 April 2016.

The rules changed in April 2016 when basic and a single-tier state pension replaced additional state pensions. The full level of the new state pension is £179.60 a week in 2021-22.

If you’re self-employed, you don’t get pension contributions or Sick Pay from your employer. There are three main pension options available to you:

1. Personal pensions

Some of the UK’s biggest pension providers offer personal pensions. Similarly, insurance companies offer private pensions, which have become more competitive, but charges can still vary.

There is a wide choice of investments available. You would typically have an option of cautious or adventurous funds, depending on your risk tolerance.

2. Self-invested personal pensions (SIPPs)

SIPPs are more of a manually managed approach to pension, which is a good option for those who want more choice and control over how their pension is invested.

They usually offer the widest range of investments with the most flexible retirement options but will require frequent management and review.

SIPPs can carry higher charges, but it’s money well spent if you want to make intelligent choices and earn a higher return on your investments. SIPPs usually allow you to view how your investments are performing in real-time and make preferred changes.

It’s essential to choose the right SIPP to ensure you have access to the investments you want and competitive charges.

3. Stakeholder plans

If you are just starting to save for retirement and can’t afford to contribute to your pension regularly, or if you want to stop and start payments, a stakeholder pension may make sense. 

The limits on stakeholder plans are low and flexible, and their charges are capped. Unless you request otherwise, your contributions will usually go into a ‘default’ investment fund designed for the average scheme member.

The most obvious upside to having a pension is that it allows you to still have an income when you stop working later in life.  But why should you opt for a pension plan instead of other types of investments? 

With pensions, the government gives tax relief equal to the highest rate of tax that you pay. So if you’re a basic rate taxpayer, you only need to contribute £80 to get £100 in your pension pot. And if you’re a higher rate or additional rate taxpayer, you can claim back even more tax relief when you fill out your self-assessment tax return. 

Pensions are specifically built to save money for later in life and come with certain benefits that you won’t get elsewhere. For example:

• You get a 25% tax top-up from the government, so if you pay £100, the government adds £25 to your pension. 
• Some pension plans give you affordable access to expert investment managers who invest your money in various assets managing risk effectively.
• If you pass away before 75, your pension can usually be passed on to your beneficiaries as a lump sum without inheritance tax deductions.
• New pension freedom rules give you more options when it comes to what you do with your pension savings when you retire, including taking out up to 25% as a lump sum without paying tax.

There are several different types of pensions offered by many different providers. To help decide which pension that’s right for you, it’s worth considering these factors:

1. Flexibility

If your earnings vary, it can be a good idea to pick a pension plan that doesn’t require you to pay in a fixed amount each period.

2. Choice of funds

Some pensions offer more investment choices than others, giving you more ways of potentially growing your pot. For example, you can choose a way to invest ethically or invest in specific industries such as renewable energy.

3. Fees

Make sure you read the fine print and know precisely how much you’ll be charged, as these fees reduce the amount in your pension pot.

4. Pension contributions

Find out how much you can afford to contribute to your pension and how often you must pay in. For example, does the scheme allow lump-sum contributions when you can afford to make them or are you required to pay in a set amount each month?

On top of running your business (have a look here for tips on running your small business), starting a pension can feel overwhelming. It can seem like a big commitment, so consider the following tips to help ease your mind and mental load.

• Start sooner rather than later. Start paying in as soon as possible to get more tax relief and give your money more time to grow.

• Try to pay in a regular amount. It can be intimidating to save a large lump sum for your pension. Establishing a regular saving habit will help you get a start on saving for your future.

• Increase your payment when you can. For example, if your earnings increase or you land a big contract, consider increasing your regular payments or paying a lump sum into your pension.

• Picture your retirement. It can be hard to think of yourself no longer working when your retirement is still a long way off. Think of the dreams and goals you’d like to pursue when you finish working. Picturing the positive benefits of saving can be an excellent way to motivate saving. 

• Review regularly. Once every six months, take a look at your pension and consider whether you’re on track to save enough and if your pension scheme still meets your needs. 

Saving for your retirement can be effortless when your finances are organised well. 

Thousands of business owners are using the Countingup app to save time on their financial admin and focus on growing their business. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK.

With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here.