How to save for a pension when you're self-employed

How to save for a pension when you're self-employed

If you’re scratching your head wondering how on earth you can save for a pension when you’re self-employed, you’re not the only one. One of the downsides of switching to self-employment is losing your previous employer’s workplace pension and pension contributions. As well as being in control of your work, you’re also now completely responsible for your retirement fund.

How you save for your pension will depend on the type of pension you’re saving for. Here are a few starting points if you’re self-employed and you want to start saving for a pension.

State Pension

The State Pension is a recurring payment that the Government makes to anyone in the UK when they reach the State Pension age. The amount that someone receives is determined by the number of ‘qualifying years’ for which they’ve made relevant National Insurance contributions. The full State Pension is currently £179.60 per week.

How to prepare for your State Pension when you’re self-employed

Unlike private pensions, you have limited control of how much State Pension you receive, as it’s entirely based on your National Insurance contributions. As a self-employed person, you will probably pay Class 2 National Insurance Contributions (NICs), which will count towards your entitlement to State Pension. Class 4 National Insurance Contributions are not relevant to the State Pension, so you won’t receive more State Pension if you pay these as well as Class 2. If you have any questions or concerns about National Insurance and your State Pension, we’d strongly recommend seeking the advice of an accountant.

Private pensions

A private pension, also known as a personal pension, is a pension that you arrange yourself. When you pay into a private pension, the pension provider usually puts your money into some kind of investment fund. There is no one-size-fits-all private pension, and how much you get back at pension age depends on a variety of factors, such as how much you chose to pay in, and how well the pension provider’s investments performed.

There are several different kinds of private pensions, with two of the most notable being stakeholder pensions, which must meet certain government requirements, and Self-Invested Personal Pensions (SIPPs), which allow more granular control over specific investments, but often require the assistance of a financial advisor to manage.

How to save for a private pension when you’re self-employed

There are a few key points to bear in mind when you’re planning how to save for your private pension:

Start early

When it comes to saving for a private pension when you’re self-employed, one of the most important things is not which provider you choose or how much you decide to invest, but when you start. The sooner you can get started, the bigger your pension pot will be when you hit retirement age. When you factor in the compound interest you’ll get on your savings, it’s clear that starting as soon as you can will pay off in the long run.

Track down your old pension pots

It can feel like you’re starting from scratch when you make your initial self-employed pension plans, but you might be standing on surer ground than you think. Some personal pension providers, such as PensionBee and Nutmeg, can help you track down old pensions you paid into in the past and consolidate them into a single private pension. If you’ve had a number of different employers, you probably have a few different pension pots out there.

Remember that you’ll get tax relief on contributions

Although you won’t have an employer matching your pension contributions, you will get some tax breaks. The government will give you tax relief on your pension pot contributions, usually up to a limit of £40,000 in contributions per year. If you’re a basic-rate taxpayer, the government will top up your pension with £25 for every £100 you pay in.

If you’d like to learn more about pensions for self-employed people, check out our comprehensive guide to pensions. Not using FreeAgent to manage your small business admin yet? Try a 30-day free trial today.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

Related Articles