How to set up a pension if you're self-employed

More than three-quarters (76%) of self-employed workers are not currently paying into a pension, while 38% have no pension at all.

This was the alarming finding by investment platform Interactive Investor in its annual retirement survey.

While the vast majority of employees are now saving into a pension, thanks to the government’s auto-enrolment initiative, this does not apply to self-employed workers and freelancers. 

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The majority continue to fall through the retirement saving gap, and could be in for a shock when they reach their golden years.

“The figures are stark when it comes to pension saving among the self-employed,” says Interactive Investor. “Unfortunately, self-employed people often miss out because, unlike employees, they’re not automatically enrolled in a workplace pension when they start work. But not paying into a pension could leave you falling a long way short of your retirement goals.”

We look at the different options available to self-employed workers, and highlight some pension providers to consider.

Do I get a pension if I’m self-employed? 

You should qualify for the state pension, currently worth a maximum of £221.20 a week (or £11,502 a year) for those in receipt of the full new state pension.

You’ll need 35 full years of National Insurance contributions (NICs) to get the full amount. If you end up contributing less than that, but have at least 10 years’ of NICs, you’ll get a smaller pension.

(If you’re thinking of buying extra NICs to make up for missing years, read this article about the state pension top-up deadline first).

But the state pension alone is not sufficient to achieve a comfortable retirement. You will need extra income on top, whether that’s through a private pension, an old workplace pension or other types of savings.

In terms of a workplace pension, you may have one from a previous job before you started working for yourself. Or it may be that as part of your self-employed work, you are on a zero-hours contract and qualify for a pension under auto-enrolment rules. 

However, the reality is that for most self-employed workers, having an active workplace pension where your employer pays in some money, and you also contribute a percentage of your earnings, is unlikely to be an option.

There is no boss or HR team organising a pension scheme for you when you’re freelance. Instead, you need to take matters into your own hands and sort it out yourself. That means choosing a retirement savings vehicle, and also selecting the investments and how much you want to contribute.

But this can feel difficult and overwhelming, and combined with running a business as an entrepreneur, “setting up a pension” often falls to the bottom of the admin pile.

Holly Mackay, founder of the consumer site Boring Money, agrees, saying: “Without an employer’s guidance, choosing a pension can be a daunting task and people generally don’t know where to start.” 

Why it’s vital to save for retirement 

You may already be saving for the long term, but not via a traditional pension. For example, you may be squirrelling away money in an ISA, or investing in buy-to-let.

But pensions are uniquely designed for retirement saving, and come with the added bonus of free cash from the government. It doesn’t matter whether you’re employed or self-employed, everyone qualifies for pensions tax relief.

Basic-rate taxpayers receive a 20% top-up, higher-rate taxpayers get 40% and additional payers get 45%.

Say you earn £60,000 a year. You put £5,000 into a private pension. Because you’re a higher-rate taxpayer, you can get 40% tax relief, which means the £5,000 pension contribution costs you just £3,000.

This tax relief makes pensions very valuable. They are more restrictive than say ISAs though, as you won’t be able to touch the money until age 55 at the earliest (rising to 57 in 2028). But this could also be seen as a plus point, as it means your pension savings are locked away until retirement, and there is no risk of you withdrawing money for other reasons.

If you don't have much retirement savings, you might be thinking that continuing to work into old age is a solution - and data shows that plenty of over 60s are working part-time or doing freelance work. 

But what about if you become ill and have to stop work? And what about your dreams to enjoy retirement, perhaps go on more holidays, and spend time with family and friends?

You’ll need a decent nest egg to ensure you can look after yourself as you get older, and to achieve a comfortable retirement.

What are my options? 

There are several pension options available to you. These include ready-made personal pensions and self-invested personal pensions (Sipps).

You can get a personal pension from some of the UK’s biggest insurers - think Aviva and Scottish Widows - as well as a range of so-called robo-advisers like Wealthify, Nutmeg and Moneybox. Robo-advisers ask you to complete a short questionnaire and based on the answers recommend a ready-made investment portfolio for you. For example, if you want a low-risk portfolio, or if you want to invest ethically.

Investment platforms like AJ Bell, Interactive Investor and Hargreaves Lansdown also offer Sipps where you can take a DIY approach and build your own pension using investment funds, shares and bonds. Some also offer ready-made portfolios to suit your goals.

You can contribute up to £60,000 each tax year into a pension and receive tax relief. This £60,000 annual allowance is reduced if you’re a particularly high earner (if your “threshold income” is over £200,000 and your “adjusted income” is over £260,000).

Depending on the pension you choose, you can normally pay in ad-hoc lump sums, or set up a regular monthly payment. The former is useful if your income varies wildly throughout the year. The latter is good for a “set it up and forget about it” approach, so you know you’re regularly putting some money away for your golden years.

Another option is a lifetime ISA. To open one, you must be aged between 18 and 39. Once you’ve opened the account, you can contribute up to £4,000 each year until you’re 50. Like other ISAs they can grow tax-free, but unlike other ISAs the government pays a bonus to incentivise people to save.

You get a juicy 25% bonus worth up to £1,000 every tax year, depending on your contribution. For example, if you pay £2,000 into your lifetime ISA in a tax year, you’ll receive a £500 top-up. 

The money can either be used to buy a first home worth up to £450,000, or for later life at age 60 or over.

This bonus is effectively the same as receiving basic-rate tax relief on pension contributions. When you withdraw money from a lifetime ISA (or any type of ISA), it’s tax-free. Pensions withdrawals on the other hand are subject to tax.

This means a lifetime ISA could be a better vehicle for a freelancer paying basic-rate tax (as long as you meet the age requirements).

If you’re a higher-rate taxpayer or additional-rate taxpayer, a pension is likely to be the best choice as you’ll get 40% or even 45% tax relief on contributions.

Best pension providers 

AJ Bell, Moneyfarm, Nutmeg, PensionBee and Vanguard are some of the best pension providers, according to Boring Money's 2024 Pension Awards.

They all scored 4.5 stars out of 5 from Boring Money, the top rating given out in the awards.

AJ Bell was commended for being low cost, and for having "good investment ideas and content". Boring Money said Moneyfarm was "really easy to use" and it liked its ready-made options.

Nutmeg was also commended for being easy to use, while PensionBee "brings pensions together" and has a "nice digital service".

Vanguard offers one of the cheapest pensions on the market and has a good range of funds - although note that you can only choose from Vanguard funds, and not funds from other investment houses.

Fidelity and Interactive Investor score 4 stars, so worth looking at those providers too.

When comparing pension providers, check out the fees and charges, read reviews from existing customers and if you like to manage your admin on a smartphone, make sure there is a decent app to keep the process simple to manage. 

How much should I pay in? 

This is a tricky question as there’s no right answer, or magic formula. The most important thing is to open a pension and pay some money in. Even if it’s a one-off £100 payment, or you set up a regular £50 monthly contribution, it’s a start. You’ve got over the first hurdle.

When you’ve got a bit more free time and the headspace to think about your retirement saving strategy in detail, you can begin to work out how much you can contribute. 

Think about the type of retirement lifestyle you want, whether you’ll still be paying rent or a mortgage in retirement, and how long you think you might live (for example, if you have any health issues that may affect your life expectancy).

Get a state pension forecast so you know how much you’ll likely get from the government when you reach state pension age. Do you have any other income say from buy-to-let, nest eggs like savings accounts or Premium Bonds, or old pension pots lying around?

Try and build up a clear picture of what assets and income you already have, and what your retirement could look like. 

Once you’ve done that, there are plenty of online pension calculators to help you work out how much to pay into a pension. You can also try the government’s online midlife MOT to help you plan for the future and improve your financial wellbeing.