A complete guide to self-employed pensions 

7 min Read Published: 21 Feb 2024

Self-employed pension guideWhat is a pension and how does it work?

A pension is a product designed to provide an individual with a method of saving for their retirement. Anybody paying into a pension will qualify for tax relief at their marginal rate of tax up to an annual allowance of £60,000.

Payments into a pension will grow over time and this pot of money can be accessed from the age of 55 to provide an income in retirement. From the 6th April 2028, the age at which you can access a pension will be rising to 57.

There are various options available at this point from taking a lump sum to purchasing a guaranteed income for life (annuity). Another benefit of a pension is that on death it is normally free of inheritance tax (IHT) and does not form part of your taxable estate. Any money taken out of your pension will become part of your estate on death and, therefore, be subject to IHT. With the tax relief available on your contributions and the potential for your pension pot to grow over time, starting a self-employed pension is a key part of planning for your future. Out of an estimated 4.8 million self-employed people, only 14% are believed to have a pension plan.

What are my pension options if I'm self-employed?

There are five main types of pension available for the self-employed, explained below.

Ordinary Personal pension

  • an ordinary personal pension is easy to set up and will allow investment in a limited range of funds offered by the pension provider
  • these schemes are typically run by insurance companies
  • normally covered by the Financial Services Compensation Scheme (FSCS) up to 100% if the company goes bust
  • not covered for any investment losses

Stakeholder pension

  • a stakeholder pension is a personal pension with low and flexible contributions, capped charges and a simple default investment strategy
  • allows flexible contributions which may be useful for those that are self-employed and have a fluctuating income
  • covered for up to £85,000 under FSCS rules if the pension provider goes bust
  • not covered for any investment losses

Self Invested Personal Pension (SIPP)

  • essentially a pension 'wrapper' that holds a selection of investments until you want to withdraw a retirement income.
  • similar to a personal pension but with a much wider range of investments to choose from
  • even if you have no investment knowledge you should not be deterred from starting a SIPP as most SIPP platforms have ready-made investment portfolios to make your investment choice easier
  • covered for up to £85,000 under FSCS rules if the pension provider goes bust
  • not covered for any investment losses

We strongly suggest you read our comprehensive article - The best and cheapest SIPPs to find the best SIPP provider for you.

NEST pension

  • the National Employment Savings Trust (NEST) was set up by the government to ensure everybody has access to a workplace pension scheme
  • NEST pensions are also available to a self-employed person as long as they are either self-employed or a single person director of a company and between the age of 16 & 75
  • a self-employed person will need to set up their own contributions to NEST
  • with a NEST pension if you move from self-employed to being employed, you can still keep your existing NEST pension with the ability for more contributions to be added

More information regarding NEST can be found in our independent NEST pension review.

Small Self Administred Schemes (SSAS)

  • a SSAS is generally set up to provide retirement benefits for a small number of directors or key staff of a business
  • a SSAS is run by its Trustees who may also be members of the scheme
  • unlike a SIPP, a SSAS is classed as an occupational pension scheme so there are slightly different rules governing them
  • one advantage for a business is that a SSAS can invest in the business of a director whereas a SIPP cannot

For a more detailed explanation of the various self-employed pension schemes, check out our article 'Which is the best pension if you are self-employed?'

Am I entitled to a State pension?

  • you will usually need a minimum of 10 qualifying years on your National Insurance record to get any State pension. They do not have to be 10 qualifying years in a row
  • if you are a man born on or after 6 April 1951 or a woman born on or after 6 April 1953 then further details can be found here - The new State pension
  • if you are a man born before 6 April 1951 or a woman born before 6 April 1953 then further details can be found here - The basic State pension

Whilst the State pension may provide you with an income in retirement it is unlikely to be enough to live a comfortable retirement. Also, as life expectancy increases, it is likely that the retirement age at which the State pension can be accessed will be increased over time.

How much should I save into my self-employed pension?

The amount you should pay into your self-employed pension depends on the following three factors:

  • current age
  • proposed retirement age
  • pension income required at retirement

Clearly the earlier you start your self-employed pension, the larger you pension pot will be on retirement and the lower your monthly contributions will be.

Do you get tax relief on a self-employed pension?

  • as a self-employed person there is no limit to how much you can pay into your pension. Contributions up to £60,000 will attract tax relief; 20% of this will be added to your pension at source
  • if you are a higher-rate taxpayer then an additional 20% tax relief can be claimed through your tax return
  • if you are an upper-rate taxpayer then you can claim a further 5% in addition through your tax return making 45% in total

What are the rules for a self-employed pension?

  • from the age of 55, you can access your self-employed pension savings
  • any cash taken from your self-employed pension will be tax-free up to 25% of the pension pot
  • any further withdrawals from your self-employed pension will attract income tax at your marginal rate of tax
  • you can also purchase an annuity that will guarantee an income for life

What happens if I move from self-employed to employed?

If you change your employment status from self-employed to employed you can still contribute to your existing self-employed pension. In addition, your new employer may also be prepared to contribute to your existing pension scheme. Also, you may be able to contribute to any separate pension scheme your new employer may have so make sure you ask for this information when starting your new job.

What happens if I move from employed to self-employed?

If you move from being employed to self-employed you have the following options:

  • continue to pay into your current scheme if the option is available
  • leave your workplace pension as it is and benefit from future growth or defined benefit
  • start a new pension
  • combine your pensions into one pot which may make it easier to manage and control - check out our article 'What is pension consolidation and how do I do it?'
  • if you currently have a defined benefit pension (one that pays a pension based on your length of service) then seek financial advice before making any transfer to another pension

What happens to my self-employed pension if I die?

If you die before the age of 75 then the value of your pension will be passed to your beneficiaries free of inheritance tax (IHT) and income tax. If you die after the age of 75 death benefits will be taxed at the recipient's marginal rate of income tax.

Should I seek financial advice when starting a self-employed pension?

Normally there is no need to seek financial advice when starting a self-employed pension. Most pensions can now be started online in a matter of minutes. However, if you currently have a number of old pensions and you are not sure what is the best action for you than seeking the advice of a financial adviser is recommended. Check out our article '10 tips on how to find a good financial adviser'

Can I sell my business to fund my retirement?

Many self-employed people may think that the business they own could be sold to fund their retirement but there are a number of things to consider before pursuing this option.

  • what is the value of the business?
  • will the sale provide enough income for you in retirement?
  • will the business be easy to sell?

Many business owners who have built up a business over many years may unintentionally inflate the value of their business. Talk to an independent valuer to get a true picture of the value of your business on the open market to see if this is likely to meet your expectations.

Pension v Property

There are many people who invest in property and see this as their 'retirement pot'. You may plan to downsize in later life to release some equity or you may be building up a portfolio of rental properties to finance your retirement.

Investing in property to fund your retirement can be a great strategy but there are a number of things you should consider.

  • there will be capital gains tax to pay when you sell a property
  • income tax is payable on your rental income
  • inheritance tax is payable when you die
  • you may not be able to sell when you want to
  • you could end up in negative equity
  • you may have to pay stamp duty when you buy a property
  • costs can be high, such as repairs, maintenance, legal fees, surveyors’ fees, agents’ fees, insurance
  • you may have vacant periods with rental properties and receive no income
  • you can spend a lot of time and effort managing a property yourself, and you have legal responsibilities as a landlord
  • if you were thinking of funding your retirement by downsizing, you may change your mind when you near retirement age

Conversely, there are things to consider when investing in a pension

  • your money is locked away until age 55
  • there’s no guarantee of investment performance – your investments could fall in value meaning you may run out of money in retirement
  • you have to pay fees and charges on your investments
  • some schemes have limited investment choice and poorly performing funds
  • you pay income tax on anything you withdraw above the 25% tax-free lump sum
  • various scandals have tarnished consumer trust in the pensions industry

There is no right or wrong answer on the subject of Pension v Property, it really comes down to personal preference and your attitude to the different risks involved.

For a more detailed explanation read our article - Property v Pension which is the best investment

Pension v LISA

The Lifetime ISA (LISA) was launched in April 2017 and offers those aged 18 to 40 an alternative when it comes to retirement funding.

  • savings get a 25% bonus from the government
  • you can add up to £4,000 a year
  • can only contribute up to your 50th birthday
  • these tax benefits are economically identical to the 20% basic rate tax relief enjoyed with a pension
  • there is no extra tax relief for higher and upper taxpayers with a LISA
  • you can only access your savings from age 60 with a LISA (compared to age 55 with a traditional pension)
  • any withdrawal from a LISA is tax-free whereas withdrawals from a traditional pension (apart from the 25% tax-free lump) are taxed at the recipient's marginal rate of tax