A pension is simply a pot of money that you can pay into with the aim of providing you with an income in retirement. If you are under the age of 75 you are entitled to tax relief on contributions subject to an annual allowance.
Once you have reached the age of 55 you are able to access your pension by either withdrawing cash or by purchasing an annuity (providing a guaranteed income for life). Any income withdrawn from your pension will be taxed at your marginal rate of tax at the time of withdrawal. For more information on withdrawing cash from your pension, check out our article 'What is pension drawdown and how does it work?'
Do I need a pension if I am self-employed?
Often when people are self-employed they feel that they may not need a pension as they plan to work beyond their retirement date. However, there will come a time when you would like to have the choice to be able to retire and taking an income from a pension plan can supplement any potential state pension and make this a reality. The earlier you start a pension plan the better as just a relatively small monthly contribution can grow to a sizeable pension pot over the years.
The majority of employed people will receive a company pension when they retire, often benefitting from the additional contributions made by their employer, however as a self-employed person, your financial future is in your own hands. So if you currently have no pension in place take action now and start planning for your retirement.
How much can I pay into a pension if I am self-employed?
How much you pay into a pension will depend on how much you can comfortably afford and how much income you will require in retirement. You can pay up to £40,000 into your pension per annum and receive tax relief on that amount at your marginal rate of tax. If you are looking to make contributions above this limit then you can also save up to £20,000 into an ISA which will provide a flexible tax-free sum to complement any pension savings. Payments into an ISA do not qualify for tax relief but all withdrawals are tax-free.
We strongly suggest that you use our comprehensive pension calculator to help you decide your retirement planning in detail.
Self-employed pension choices
The most popular pension plan for self-employed people is a personal pension, where you can invest contributions in a variety of funds offered by the pension provider. Your chosen provider will also claim 20% tax relief on your behalf and add this to your pension contribution (which equates to a 25% top-up on the money that you pay in).
Example: If you paid £80 per month into your pension, then your contribution will be topped up to £100 if you include the tax relief (as £20 is the amount that the government would have collected in tax from the £100 total).
Higher rate taxpayers can claim an additional 20% tax relief while top-rate taxpayers can claim an additional 25% tax relief. This extra tax relief is claimed through your tax return rather than automatically added to your pension.
There are three types of personal pension to choose from:
Ordinary personal pension
A personal pension is easy to set up and will allow investment in a limited range of funds offered by the pension provider.
A stakeholder pension is a personal pension with low and flexible contributions, capped charges and a simple default investment strategy. Contributions can be flexible which may be useful for the self-employed who could be on a fluctuating income.
Self-Invested Personal Pension (SIPP)
A SIPP is essentially a pension 'wrapper' that holds a selection of investments until you want to withdraw a retirement income. A SIPP is 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.
We strongly suggest you read our comprehensive article "The best and cheapest SIPPs" to find the best SIPP provider for you.
The National Employment Savings Trust (NEST) was set up by the government following the introduction of auto-enrolment. It ensures everybody has access to a workplace pension scheme. The NEST pension is 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. As a self-employed person, you will need to set up your own contributions to NEST. One thing that is useful with a NEST pension is that if you move from being self-employed to employed, you can keep your existing NEST pension with a view to continuing contributing through your new employer (assuming they are registered with NEST)
More information regarding NEST can be found on the NEST website.
Small Self-Administered 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, which a SIPP cannot.
What about my existing pensions (i.e. from when I was employed)?
Most people will likely have small existing pension pots, perhaps from when they were previously employed. The good news is that you can consolidate your pension pots into one plan to make them easier to manage and then carry on contributing to it as a self-employed worker. There are now services such as Penfold* (see below) which specialise in doing this for the self-employed.
What is the best pension for me if I am self-employed?
A SIPP is a good choice if you are self-employed as it provides flexibility in both the contribution level and the investment choice available. There is no requirement to have any investment knowledge as there are often various ready-made portfolios designed to reflect your investment aims and risk profile.
Below I have looked at the best SIPPs, split into five different categories to enable you to find the best pension provider for you.
Best self-employed pension provider for beginners with existing pensions
- a product specifically designed with the self-employed in mind
- fast setup - can set up a pension in five minutes
- will help consolidate all of your existing personal pensions into one plan
- no minimum contributions unlike other pensions
- ability to stop or pause contributions at any time or make one-off top-ups or not contribute anything (ideal for self-employed income)
- low cost with an annual charge of 0.75% (0.45% over £100,000)
- for more information read our full unbiased Penfold review
Best self-employed pension provider for beginners
- ideal for anyone wanting to minimise costs but want someone else to manage their money
- a choice of 10 ready-made investment portfolios with varying levels of risks
- a minimum investment of £500 is required to open an account
- annual fee of 0.75% for investment under £100,000 (fully managed)
- Money to the Masses has secured an exclusive offer that means Nutmeg will waive its management fees for the first 12 months.
- for more information read our full unbiased Nutmeg review
Best self-employed pension provider for low annual charges
- start a pension for as little as £25 per month
- offers a selection of managed portfolios based on 6 risk levels
- annual fee of 0.25% for investments up to £250,000
- fund dealing is a flat fee of £1.50 online
- share dealing is £9.95 per deal for zero to nine deals in a month
- for more information read our full unbiased A J Bell review
Best self-employed pension provider for low dealing charges
- fund dealing is free, online share trading at £11.50 per trade
- annual account charge of £100 +VAT waived if combines assets are £30,000 or more
- annual fee of 0.35% up to £250,000
- for more information read our full unbiased Charles Stanley review
Best overall self-employed pension provider for tools and functionality
- start a pension from as little as £25 per month
- the most popular SIPP in the UK
- excellent website, app & range of tools to help manage your investment
- annual fee of 0.45% up to £250,000
- fund dealing is free
- for more information read our full unbiased Hargreaves Lansdown review
Comparison Table - Best pension provider for self-employed
|Provider||Money to the Masses says:||Minimum Investment||Fees per annum|
|Penfold*||Designed for the self-employed. Low cost, flexible & helps consolidate existing pensions||None||0.58%|
|Nutmeg||Good for beginners||£500 upfront||
0.75% up to £100,000
|A J Bell Youinvest*||Low annual charges||£25 per month||
0.25% up to £250,000
|Charles Stanley||Low dealing charges||£500 upfront or £100 per month||
0.35% up to £250,000
|Hargreaves Lansdown*||Great tools and functionality||£100 upfront or £25 per month||
0.45% up to £250,000
If a link has an * beside it this means that it is an affiliated link. If you go via the link Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. But as you can clearly see this has in no way influenced this independent and balanced review of the product. The following link can be used if you do not wish to help Money to the Masses - Penfold, AJ Bell, Hargreaves Lansdown
Looking for a financial adviser near you?
Do you need financial advice? An independent financial adviser can show you how to make the most
of your money. Find your nearest qualified and regulated adviser using this VouchedFor search tool.