Self-employed pensions in the UK: Your options

Zorica Lončar

If you work for yourself, you may have the benefit of choosing your own flexible working hours and being your own boss. But you will also need to take responsibility for other things yourself, such as saving for retirement. While employed people can rely on workplace pensions to supplement their state pension in later years, you’ll need to make your own arrangements.

In this guide, we’ll explore your options for self-employed pensions in the UK. This includes stakeholder pensions, self-invested personal pensions (SIPPs) and the Government’s NEST pension scheme.

We’ll even throw in another handy tip for self-employed people wanting a cost-effective way to manage their finances. Open a Wise multi-currency account and you can get paid in multiple currencies, from clients all over the world.

Learn more

But more on this later. For now, let’s get stuck into self-employed pension options.

The state pension for self-employed workers

Before you start looking into personal pensions, it’s useful to know about the state pension for self-employed people.

If you work for yourself, you’re eligible to receive the state pension just like anyone else. The total pension you’ll get depends on your National Insurance (NI) contributions record, and you could get more if you’ve worked for an employer in the past.

You can get a pension forecast statement from the Government’s website to check the current state of your pension pot.

But it’s likely that this alone won’t be enough to live on during retirement, so you may want to consider other pension arrangements. Unlike with workplace pensions, you don’t have an employer paying into your pension - boosting your overall retirement savings. This is where personal pensions come in.

Personal pensions in the UK - your options

According to the Money Advice Service, only 31% of the UK’s 4.8 million self-employed people are currently saving into a pension¹.

If you haven’t yet got round to sorting it, there’s no time like the present.

You’ll have a few different options for personal pensions, including stakeholder pensions and SIPPs.

Standard personal pensions in the UK

Ordinary personal pensions can be opened by anyone, and are available from a wide range of different providers.

They’re quite straightforward, as most work just like a savings account. You pick a provider, arrange to make regular defined contributions and your pension pot will grow according to investment returns and interest rates set by the scheme.

You can also benefit from tax relief on contributions, which will be claimed by the provider and added to your pension pot. At present, basic-rate taxpayers will receive £25 in tax breaks from the government for every £100 they pay into their pension. This is available on all pension savings up to the personal allowance, which for 2021-22 is £40,000 a year¹.

This makes saving into any kind of personal pension (including the options below) a pretty smart move.

When you retire, you’ll have a few flexible options for how you access your pension.

Stakeholder pensions in the UK

These are another kind of defined contributions pension scheme, with a few key differences.

Stakeholder pensions tend to have capped charges (at 1.5%)¹ and low, flexible minimum contributions. Each scheme must meet standards set by the Government, which includes offering a default investment fund. This is designed for people who don’t want to have to choose where to invest their money - it can make it easy, if you’re just looking for a straightforward pension scheme.

Otherwise, you can pick from a range of investment funds, usually involving stocks and shares. Which you choose all depends on your attitude to risk, as it’s important to remember that the value of investments can go down as well as up.

When you reach the age of 55, you can start taking money out of your stakeholder pension - whether or not you’ve actually retired².

Self-invested personal pensions (SIPPs) in the UK

Now we come to the last type of personal pension, the SIPP. This works in a similar way to an ordinary personal pension, but with more flexibility when it comes to investment choices.

With a SIPP, you’ll have the freedom to choose investments and manage how your pension fund grows. You can switch between investments and select from a range of assets, including government securities, stocks and shares, commercial property and much more. Alternatively, you can hire an authorised investment manager to handle everything for you.

SIPPs act as a kind of ‘wrapper’, holding your investments until you can start to draw an income upon retirement. Generally speaking, this kind of pension is best for those with a large pension pot and some experience in investing. They also tend to have higher fees than other kinds of personal pension.

NEST - is the government pension scheme for self-employed people?

Alongside personal pensions, there’s another option available for self-employed workers looking to save for retirement. This is NEST, the National Employment Savings Trust.

NEST is actually a workplace pension scheme set up by the UK Government to help with automatic enrolment. It’s a defined contribution scheme run for the benefit of its members, so there are no profit-making shareholders involved.

While designed for employed workers, you may also be able to join NEST if you’re self-employed. You may qualify if you meet the following criteria³:

  • Self-employed or the sole director of a company that doesn’t employ anyone else
  • Aged between 16 and 75 years old
  • Ordinarily work in the UK and are only subject to UK social and labour laws (not those of an EEA country).

If you are eligible, you can benefit from an online, easy to use pension scheme. It has a simple charging structure and offers some key choices over how your money is invested. NEST is considered to be a low-risk pension scheme, which also means it may deliver lower returns than other kinds of pensions.

How to choose the right self-employed pension for you

Choosing a self-employed pension scheme is a big decision, so it’s important to get it right. There are lots of factors to weigh up, from tax implications to how much you can afford to contribute to your pension on a regular basis.

Take your time and do your homework, looking into each scheme to work out whether it suits your circumstances and retirement savings goals.

You can also use online self-employed pension calculators to see how your retirement fund could grow with each different option. One of the best is the Money Advice Service pension calculator, which takes into account personal, workplace and state pension pots to help you estimate your retirement income. Crucially, these calculators help you work out what you need to retire, and how to get there.

It could also be a good idea to seek guidance and information from an independent pensions adviser. They can look at your unique situation and recommend the best retirement savings solution for you.

Looking for a cost-effective way to manage your self-employed finances? Choose Wise.

When you’re self-employed, you’ll need to find the best and most cost-effective ways to run your business. Every penny counts, and the decisions as to what products and services to use fall on your shoulders alone.

One of the smartest choices you can make is to use Wise, especially if you have clients, customers or suppliers in other countries.

Open a multi-currency Wise account and you’ll have a low-cost way to send and receive money internationally. You can invoice overseas clients like a local, receive payments in multiple currencies and convert to GBP for tiny fees and the real, mid-market exchange rate.

With Wise, you can even get a linked global debit card, for contactless spending in 200+ countries with no foreign transaction fees to worry about. There’s only a tiny fee to convert the currency, which happens automatically the moment you tap and spend. And if you already have the currency in your Wise account, you won’t pay a thing.

Join Wise today

So, that’s pretty much it - all you need to know about self-employed pensions for UK freelancers and entrepreneurs. We’ve run through all of the main options, from a standard personal pension to SIPPS and the government’s NEST scheme.

Remember that retirement planning can be complex, so make use of expert pensions advice if you don’t know which way to turn. Whatever you do, just don’t leave it too late to start saving for retirement!

Sources used for this article:

  1. Money Advice Service - pensions for the self-employed in the UK
  2. Money Advice Service - stakeholder pensions in the UK
  3. NEST pensions - self-employed checklist

Sources checked on 27th April 2021

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

Money for here, there and everywhere

Find out more
Personal Finance

Alex's Story

Each Christmas, scammers target people with holiday booking scams. Read Alex's story to learn how scammers stole their money and tried to ruin their holidays.

24.11.23 1 minute read
Personal Finance

Max's Story

Each Christmas, scammers target people with holiday booking scams. Read Max's story to learn how scammers stole their money and tried to ruin their holiday.

24.11.23 1 minute read

Tips, news and updates for your location