How to save for retirement when you’re self-employed

Jenni Hill

Personal Finance and Business Finance Writer | I talk money without boring people to death

If you’re a freelancer, contractor or small business owner, you’re not alone if the word ‘retirement‘ fills you with fear. Whether you’re trying to make a living with an unpredictable income or pouring as much money as possible back into your business, you might find it hard to prioritise saving for retirement when you’re self-employed.

According to a survey of 2,000 people by pension provider National Employment Savings Trust (Nest), only 24% of self-employed people are actively saving into a pension. Although it may come as a relief to know you’re not the only one to neglect your retirement savings, making plans for the future is really important.

I say this as a 31-year-old freelance writer with a very modest pension pot. I started my first job at the age of 16 but have only managed to save around £5,000 in workplace pensions so far.

With such a small amount stashed away, it’s crucial that I pull my finger out and make retirement savings a priority – even though I now work for myself and no longer have access to a workplace pension.

If you’re in the same boat as me, here are a few things you need to know when working out how to save for retirement when you’re self-employed.

The State Pension will help a little

Self-employed workers are entitled to the government’s State Pension when they retire. Unfortunately, this alone is unlikely to provide you with enough money to live off in your old age.

You’ll need your own savings too – especially if you dream of being a bad granny living your best life on a yacht.

The exact amount you’ll get from the State Pension will depend on the number of National Insurance Contributions you’ve made throughout your working life.

You’ll usually need:

  • at least ten qualifying years on your National Insurance record to get any State Pension, and
  • 35 qualifying years to receive a full State Pension

For the current tax year (2021/22), the full State Pension is just £179.60 per week. Many retirees struggle to get by on this amount and rely on their own savings to live a decent standard of life.

‘My business is my pension is a risky strategy

Some business owners say they don’t need to save for retirement because they’ll use the wealth generated from their business to fund their later years.

Although this is a nice idea and selling a business or living off dividends could prove rewarding in the future, it’s risky to rely on your business alone for your retirement. What if your company goes bust?

Research your personal pension options

Since you’re self-employed, you won’t have access to workplace pensions and you’ll unfortunately miss out on employer contributions. However, this doesn’t mean you’re excluded from pensions completely.

You may decide to open a personal pension and save for retirement that way. With the help of a personal pension, you’ll benefit from many of the tax advantages that come with workplace pensions too.

Tax relief on pensions explained

One of the key perks of a pension is that you benefit from tax relief on your contributions. For employed workers, this means money is placed into their pension pot before it’s taxed instead of after.

Another way of looking at it is that an employee’s money will be worth more if they pay it into their pension (because it hasn’t been taxed) than if they were to take it as their salary.

Self-employed people can get tax relief on their private pension contributions too, but since you don’t receive a traditional paycheque each month or have a salary, your pension provider will claim the tax relief on your behalf.

The amount of tax relief you’ll get will depend on your income.

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers can claim 40% pension tax relief
  • Additional-rate taxpayers can claim 45% pension tax relief

If you’re a basic-rate taxpayer and you contribute £100 from your income into your pension, it actually only costs you £80. This is because the government adds an extra £20 on top of the money you put in by letting you keep what you would’ve paid in tax. Higher-rate taxpayers only need to pay £60 into their pension to get £100 and additional-rate taxpayers only need to pay £55.

A financial adviser could be a worthwhile investment

I’m not qualified to tell you which pension is right for you. This is where a financial adviser can come in useful. They’ll assess your financial situation in depth before helping you decide which option is right for you.

If you can’t afford to pay for financial advice right now, don’t let your tight budget stop you from making any progress. You might be tempted to wait until you can pay for an expert to tell you where to put your money, but this type of procrastination could see you missing out on valuable pension growth. After all, most pensions are invested in stocks and funds, meaning the more time they’re given to grow, the better!

Ask financially savvy self-employed friends where they save

Ask around to find out how your financially savvy self-employed friends are saving for retirement. Are they putting money into private pensions? Have they opened a Stocks & Shares Lifetime ISA? (More on this shortly). Or have they found a different route?

You could also ask around in online communities designed for people who work in your industry. This isn’t about getting financial advice from your peers. Instead, see it as an opportunity to note down the most popular answers before doing some further research to decide which is most suitable for you. That pension provider your friend loves might not work as well for you and your circumstances.

Do your own research

It’s also important to find out where your money will be invested and how much you’ll have to pay in fees. A lot of people overlook these factors, so make sure you understand what you’re investing in and how much it’ll cost you.

Since most pensions are invested in the stock market, once you’ve chosen a pension provider, you’ll usually get to select the level of risk you’re happy with. Some providers offer ethical funds which can be ideal if you only want to invest in sustainable or socially responsible companies.

The Lifetime ISA is a strong alternative to a pension

The Lifetime ISA (LISA) is another option. The LISA allows people aged 18 to 40 to save for their first home and retirement at the same time. If you open a LISA, the government will boost your contributions by 25%. So, if you put £4,000 in, you’ll receive a £1,000 top-up.

The sooner you get started, the better

Pensions can be complicated and intimidating so it’s no wonder that so many self-employed people put pension saving on the back burner and focus on their business instead.

But procrastinating on your pension for too long could reduce the amount of freedom you have in retirement. Getting started now could help you retire sooner than if you were to wait another 5 or 10 years and give you peace of mind in the meantime that you’ve got your future under control.

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