Best private pensions for the self-employed

Are you self-employed? Worried about how you’ll pay the bills when you retire? Know you should begin thinking about pensions but not sure where to start?

Relax! Setting up a pension when you’re self-employed is much easier than you think and it will give you peace of mind later on in life. Here’s everything you need to know, from what a pension is to how you go about finding the best one for you.

And if you’re in two minds whether to start a pension or not, do it, right now! The sooner you start, the richer and more secure you’ll be in retirement. Starting a pension is often the best decision you’ll ever make.

First up, what actually is a pension?

A pension is a pot of money put away for when you retire, to provide you with an income that hopefully matches the lifestyle you’ve become accustomed to, so you can continue to live your life in the same way, just without the work, hurrah! Or, you could spend it all on gardening – you might be into gardening when you retire, everyone over 60 seems to be.

Ideally, you’d typically add money to your pension throughout your working life, this money goes into something called a pension fund. Your money and thousands of other people's money will be invested across many large, stable and safe companies in the UK and across the world. It can also be invested in things like bonds, which are large loans that pay interest.

The pension fund would aim to make more money from the money invested, and as a result your pension will get bigger over time, giving you a nice big figure to live on when you retire. Kerching!

Pensions are normally very safe investments, and where your money is invested within your pension plan is typically adjusted based on your age. It’s far better than keeping cash under your bed. You can trust us on that.

Familiar with a workplace pension?

The good news for employees of a company is that it’s all handled by the company itself in partnership with a pension provider (the people who look after your pension), all through your monthly pay, called PAYE (Pay As You Earn), and you’ll see your payments on your payslip. This type of pension is called a workplace pension.

You’d also be automatically enrolled into it, and the business also has to contribute a minimum of 3% too.

It all works very well and it’s great for employees. But what about if you’re self-employed?

Pensions when you’re self-employed

Being self-employed comes with all sorts of perks – set your own hours, approve your own holidays, have a longer lunch, and best of all decide what radio station to listen to. But it does mean a bit more planning for your retirement, as you’ll have to sort your pension out all by yourself.

Instead of a typical workplace pension, where your employer handles everything for you. A self-employed pension is managed by you, you decide how much you’d like to pay, and have to set up the payments yourself. However, it’s easy to do! We’ve run through it all below.

Plus, the Government will top up your pension payments by 25% to make them effectively tax free like a workplace pension. We’ll dive into that more below too.

And if we’re getting technical, a self-employed pension is technically called a personal pension or a private pension, rather than a self-employed pension – as you don’t have to be only self-employed to get one, employed people can too if they like.

Tax relief on self-employed pensions

The Government wants you to save as much as possible into your pension – it helps the economy, makes you wealthier and allows for less reliance on the state pension in future. So they let everyone contribute to their pension tax free (in boring finance terms, pensions are tax-deductible).

Don’t worry, it may all feel a bit complicated or confusing, but a good pension provider will actually handle everything all for you automatically, including the tax. A self-employed pension really is as easy as a workplace pension (almost!).

If you are in a rush, we’ve got the best pension providers to go with a bit further down (They’re PensionBee and Penfold).

And if you’d like to learn more, here’s how the tax relief actually works if you are self-employed…

As you’ll know, your pay is different to employed people – you don’t have an employer to handle everything, you have to pay tax yourself, and if you want a pension, you have to contribute to your pension yourself too. 

This means you can’t make payments to your pension before you pay tax like employees. You have to pay tax on everything you earn, so you’ve already paid tax on the money you’ll put into your personal pension.

So to give you back the tax you’ve paid on your income, and to make your pension contributions tax free, the Government will top up the payments you make to your pension with cash – yes really!

If you’re a basic rate taxpayer (which means you earn up to £50,270 in 2021/22 and pay 20% tax), the government will give you the 20% back in cash, directly into your pension – which works out as a 25% bonus on what you put in. That’s £25 for every £100 you pay in. So, you’d end up with £125 in there, just by putting in £100!

And if you pay the 40% higher rate tax (which you will do if you earn between £50,271 and £125,140), you can claim that 40% back too. However it’s not automatic, but is easy, all you need to do is claim this back from HMRC via your Self Assessment tax return.

But do watch out, as there are limits on how much you can put into your pension per year and still claim tax relief. The limits are either 100% of your earnings (your annual salary) or £60,000, whichever is the lowest.

What if I used to be employed before becoming self-employed?

When you choose a new pension plan, you can move any old pensions from old jobs over to the new one you’ll set up for your self-employed pension, so you can keep all your money in one place, track it properly, and invest it all in the same fund, potentially benefiting from cheaper fees too.

There’s no need to panic about lost pensions of money squirrelled away and forgotten. A good pension provider can hunt down your old pension plans for you. You’ll just need to tell them the name of your old pension providers and then after that, you won’t have to do a thing!

How to get a pension when you’re self-employed

The good bit is, it’s really easy to set up a self-employed pension. Technology has really changed the industry and it’s all done via a website or an app on your phone. Although you can still speak to someone if you’d like.

All you need to do is find a pension provider that’s best for you, and they’ll pretty much handle everything. Modern pension providers come in the form of apps and websites, which have up-to-date information to show you how much your pension is worth at any time, and tools to show you how much you should be investing to meet your retirement goals.

Best of all, you now get to decide where your money is actually going. So if you only want to invest in companies doing good in the world (like we do), and avoid the evil oil and tobacco industries, you can!

So, to get a pension, all you need to do is find the best provider for you. And luckily for you, we’ve done the hard work and reviewed them already. The best providers are all below.

The best private pension providers for the self-employed

Prefer things a bit more old school?

If you’re not comfortable using a website or app for your pension, although there’s no reason not to be! We recommend speaking to a financial advisor who can sort your pension for you over the phone or in person. However, this can be fairly expensive as they’ll add their own fees on top and don’t normally pick the cheapest funds. The best way to find a good advisor for you is via Unbiased¹ – a website to find local financial advisors.

Do self-employed people get a state pension?

Yes! The state pension is a benefit paid by the government to everyone who has made National Insurance contributions over their working life, whether they have been employed, self-employed, or a combination of the two (National Insurance is a payment you make to the government alongside your taxes, to cover things like healthcare).

As a self-employed person, you are entitled to the state pension just like anyone else, as long as you qualify and have made enough contributions during your working life. To qualify you’ll need 10 years worth of National Insurance contributions.

However, the pension payments you’ll get is not a lot of money. To put it plainly, you might struggle to live on it if you only had the state pension to fall back on, without the support of a personal pension to supplement it. The full state pension in 2023/24 is currently £203.85 a week.

And if you have been self-employed for some time and had some lean times where you didn’t earn much, you may not have met the threshold to qualify. In other words. you may not have made any National Insurance contributions, or you may just not have made enough.

There’s a handy tool for checking what you may be entitled to, the State Pension Forecast.

How much can I pay into a pension? 

You can pay as much or as little as you want into your personal pension, although bear in mind, you’ll only get tax relief on the lower amount of either your total income or £60,000. That said, some more pension providers will set a minimum amount that you have to pay in, but it’s not typically a lot.

Generally, it’s advised to put as much into your pension as you can afford, as early as you can. That’s because your money compounds over time, this means the money you put into your pension also then begins making money itself too.

For example in year 1 you invest £100 and at the end of the year you make a 5% return (£5). For year 2 it's now worth £105 and you make 5% on £105 (£5.25)... you get the idea.

This is how you can grow a small figure into a very large amount over time. Called compound interest.

Please note though, you need to make sure you can comfortably afford to say goodbye to your monthly payments, as you won’t be able to spend it again until you hit retirement age!

Look at your monthly budget and see what you can afford after your outgoings like bills and other expenses, and leave enough savings easily accessible for emergencies. As a self-employed person, it’s also important to take into account any fluctuations in your monthly income, which can often vary month-to-month.

By the way, you can easily make one-off payments into your pension too – you don’t have to have a set monthly figure.

Here are a few other questions you should ask yourself when you’re deciding how much money you should squirrel away into your pension:

• Do you have any pensions from full-time work?
• How many more years will you be working?
• At what age do you plan to retire?
• How much do you need to live on in retirement?

When can I access the money in my personal pension plan?

You’re probably wondering when you can get your hands on all that cash you’ve saved!

You can currently access your pension from the ripe old age of 55. And from 2028 it will be from age 57. However, only the first 25% is tax free, which if you like, can be taken out as a lump sum. However we only recommend it if you really need it, it’s better to let it grow more! But you might decide to pay off your mortgage for peace of mind, if you still have one.

The remaining 75% you’ll have to pay income tax on, just like your income now or a salary at work. But typically most people will leave their pension alone until they decide to fully retire, which can be well over the age of 60 these days, and at which point they’d often use it to purchase something called an annuity, which provides you with a fixed monthly income for the rest of your life.

If you are nearing retirement and would like more advice, you can speak to a pensions advisor from The Pensions Advisory Service (TPAS) for free.

Ready to get a self-employed pension?

So now you know how easy it is to start a pension when you’re self-employed, there’s no excuse not to! Start saving now, it really is worth it, and you’ll be set for later life.

Our recommended pension providers are PensionBee and Penfold. But whatever pension provider you decide to use, the important thing is to squirrel away a good amount regularly, so you can really enjoy those sunset years, in the sunshine ☀️.