Funding a self-employed pension

A current development to pensions is the nationwide roll-out of workplace pension schemes known as auto-enrolment, a government initiative to help more people save for retirement. However, as it is for workplace schemes, self-employed people are excluded, meaning a self-employed pension won’t have employer contributions. 

Limits to a self-employed pension

A disadvantage of self-employment is that you are not covered by auto-enrolment. More than one in seven UK workers are self-employed and will have to take full responsibility to save for their retirement as they will miss out on the employer contributions, that would significantly increase their pension fund size.

What’s more, if self-employed people were to benefit from the advantages of being enrolled into a workplace pension, they wouldn’t have to make a conscious effort to put money aside every month. Contributions would automatically be taken from their salary and put into their pension scheme, essentially looking after their retirement for them if they make sufficient contributions.

Receiving an irregular income can pose further challenges to saving. Self-employed workers may also need to use any spare income to invest in the business to help it grow, therefore putting saving for retirement further down the list of priorities.

How to fund your retirement

Self-employed workers are eligible to receive the State Pension as long as they have been paying National Insurance contributions for at least 30 years (this will increase to 35 years from April 2016). However, the State Pension alone is not enough to rely on throughout retirement. To ensure a sufficient retirement income you will need to plan ahead financially.

You might be thinking of selling your business to fund your retirement, however this may not be as straightforward as it seems; perhaps it will take a long time to fund a buyer, or its value may not be as much as you had expected, plus there could be tax implications if you do sell it. 

You may decide to set up a SIPP that would give you the flexibility and control to manage your own investments. However, this could be time consuming and require good knowledge of financial markets and investment opportunities. There are also fewer funds available to invest in with a SIPP than a regular pension. 

If you decide to start a private pension, you could set up a direct debit to contribute a set amount each month. The earlier you start saving the better as putting smaller amounts of money away over a longer period of time can be more effective and beneficial than saving larger amounts over a shorter period of time

One of the benefits of saving into a pension compared to other savings vehicles is tax relief. Every year savers can put up to £40,000 in a pension fund and receive the tax back.

Another point to remember is that you do not have to retire when you reach State Pension age, instead you may decide to continue working and defer the State Pension, which could be part of your financial planning. Deferring the State Pension will provide a higher annual income for the rest of your life, so instead of receiving the current pension of £6,029.40 per year, you could receive up to 10.4% more for every year that you defer it. 

If you reach State Pension age before April 6 2016

…your State Pension will increase by 10.4% for every year that you don’t claim it. This equates to an extra £627.00 if you defer it for one year. If you defer it for two years you’ll receive an extra £1,319.00 a year, so your annual State Pension income would be £7,348.40.

If you reach State Pension age on or after April 6 2016…

…your State Pension amount will increase by just under 5.8% for every year that you postpone claiming it. If you are in a position to defer the State Pension, it may be worth speaking to a regulated financial adviser to find out if it is appropriate for you.

Do you have any questions about how to fund your retirement if you’re self-employed? If so, feel free to leave a comment below. 

Call 0800 304 7288 for a friendly chat about your pension

This blog is to be used for informative purposes only and does not constitute financial advice. Furthermore, it may be worth speaking to a regulated adviser to find out if the above options are suitable for our circumstances.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

We are really looking forward to reading your comments. Before you start writing, please just remember that everything you write will be displayed publically – including your name. Not sure what sort of thing you can write, and what sort of things you should avoid? Please have a quick read of our social rules for guidance.

Back to top