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Pensions for the Self-Employed Explained

Annie 16th Jun 2020 One Comment

Reading Time: 7 minutes

When you’re on a fluctuating income – and already have to save 30% for taxes – a pension is the last thing on the list. However, pensions for the self-employed are vital for future financial security.

Here’s how to set up a pension for the self-employed, and how to make sure you’re contributing regularly!

When to set up a pension

Pensions for the self-employed are vital to retirement planning

A pension is not the first thing most freelancers think of when they’re setting up a business. However, starting as early as possible means you don’t have to set aside so much money each month.
It’s never too late to start a pension – but the earlier you can, the better. There’s no earliest date you can set up a pension either – you can create a pension plan for newborn babies!

Compound interest and time for investment works in your favour. The longer your money is in your pension pot, the harder it works for your retirement fund. Even if you can only set aside £25 a month to start with, that’s better than nothing! It quickly adds up over time.

Pensions for the self-employed: your options

As a freelancer, you don’t get the benefits of a workplace pension. However, that means you can choose the pension provider and plan that suits you best. You’re not restricted to paying into a pension pot chosen by your employer.

Continuing a workplace pension

If you have a workplace pension from a previous employer, you can keep paying into it when you’re self-employed. This is a good way to keep things simple, but it might mean you’re missing out on better deals.

Many workplace pensions are cheap in terms of fees, and invest in more stable opportunities with slower growth. When you can control your pension pot, you might want to consider moving to a cheaper provider OR one with a more adventurous investment portfolio (if you have at least ten years to retirement). A riskier investment portfolio has greater highs and lows, but over time they typically provide greater returns than ‘safe’ investments.

Shopping for a self-employed pension

Some pension providers offer self-employed pensions. Others have personal pension plans that anyone can choose. The thing is, some personal pension plans require a weekly or monthly minimum commitment. Self-employed plans allow one-off contributions rather than a minimum regular amount – which is perfect for fluctuating incomes.

Check fees

Look at the management fees for different pension providers. The cheaper pensions are ‘robo investors’ – they’re not individually handled by fund managers. You can also choose where your money is invested in pre-selected portfolios based on how much risk you want to take.
More expensive pensions have fund managers who physically move money around funds to anticipate market falls or rises. They’ve gained a poor reputation in recent years but you do get a hands-off investment approach where you know (or hope!) they’re using expert knowledge to avoid major losses.

Merge your old pensions

You should also look at merging any old pensions into one. Lots of us have old workplace pensions we’ve forgotten about – it’s easy to do when you move jobs and home, not updating your address with the pension provider. Without an annual statement in the post to remind you, you could have lost money sitting in a pension pot already!

Use the Pension Tracking Service to make sure you’ve got all the info for your old pensions.

Should you merge?

Before you merge several pensions together, take a look at the pension type and fees of each one. If you move your pension from an old employer’s scheme, you’ll lose the benefits that may be in place. When that’s the case, keeping that pension open is a good idea.

Having at least two pension pots is also a good idea, to spread your investments and reduce risk. This’ll mean your money is invested in a broader range of funds, so if one provider doesn’t do so well one year, the other could still balance out any losses.

You should merge any expensive pensions, though. Old plans often come with incredibly hefty fees – these days, there’s no need to pay such huge charges that eat into your investments each year.

How to merge pensions

If you want to transfer your old pensions all into one existing plan, it’s easy to do. Ask the provider for the plan you want to transfer into for a transfer form. You’ll need a separate one for each pension pot you want to move into the plan.

It takes several weeks to arrange a transfer. However, once you’ve instructed the provider to start the process, you don’t need to do anything else!

Or, you could use a service like PensionBee, which brings your old pensions together into one new plan.

What about a LISA?

Pensions for the self-employed are just part of your retirement plan options

Pensions for the self-employed are a vital part of your retirement planning. However, it’s a good idea to consider other investments, too. The one thing about pensions is that, once you ‘crystalise’ them (start getting an income and/or release a lump sum after the age of 55), it’s counted as income. So, if you’re still working and want to access a lump sum of cash for a retirement investment (like property), you’ll start paying tax.

You can access 25% of your pension pot tax-free, but if you choose to take a 25% lump sum at first then everything you have after that is taxed at basic rate. This means if you have other income or need to access benefits, your pension could affect your tax status.

What is a LISA?

A Lifetime ISA is a savings scheme offered by the Government. It’s replaced the previous Help to Buy scheme – with an added extra option.

You can use the funds from a LISA – plus a 25% Government bonus – to pay for the deposit on your first property.


You’ll leave the money in the LISA until you’re 60. Then, you can access the entire fund whenever you want, tax-free. You’ll also get the 25% Government bonus, too.

How it works

You can set up a LISA if you’re aged between 18 – 39. You’ll pay into it until your 50, then leave it alone for ten years. Hello, compound interest!

The maximum annual limit is £4,000, and the Government pays 25% bonus on top of this. So, you could save up to £5,000 a year. The £4,000 counts as part of your £20,000 annual ISA allowance, so you can have a LISA and other ISA types at the same time.

Why LISAs are good for the self-employed

The LISA scheme is only really ideal for those wanting to buy their first property, or the self-employed. For people with a PAYE role, there are many other ways to maximise their pension opportunities.

However, self-employed people don’t get the minimum 3% employer contributions to their pension that PAYE workers do. The LISA, however, is one way to maximise your pension pot to overcome this discrepancy.

You can access the cash as soon as you turn 60 as a lump sum, and it’s entirely tax-free. This means you could save up for an investment (like a buy-to-let property) and take the lump sum without affecting your pension, other income, or tax status.

The disadvantages

There is a downside here: if you need your LISA savings before you buy a property or turn 60, there’s a penalty. It’s usually 5% (and you don’t get the Government bonus). Until April 2021, this charge is waived due to the pandemic. However, you won’t get the bonus.

LISA savings count as capital, unlike a pension. So, if your work as a freelancer dries up and you need to access benefits, it’s included in eligibility assessments. You’d be charged to access your money in an emergency, too: so it’s worth considering if your income is stable enough to have a LISA.

How to save into a pension regularly

Save little and often for your self-employed pension

The best approach for pensions for the self-employed is to save little and often. You already set aside 30% of each invoice for tax and National Insurance. Add an extra 5% (or 10%, if you can afford it) to these savings and put that into your pension.

Pay yourself first, too. Set aside your tax money, then pay into your pension, then pay your bills. Don’t wait until the end of the month to scrape money into your pension pot!

Use savings apps

There are lots of savings apps that ‘sweep’ your money into investments or savings pots. Some will work out what you can afford to save that week and automatically sweep the surplus into a savings account. Others round up your spending to the nearest £1, £5, or £10 (depending on what you choose) and put those pennies and pounds into savings.
You can sweep money into a savings account, but if you have the option to sweep into an equities ISA (such as with MoneyBox), go for it. The returns on long-term investments are typically better than savings accounts – especially with interest rates so shockingly low. (Remember, as with any investment, you could get out less than you put in).

Set up a direct debit

Saving even £25 a month into a pension is worth it. The closer to retirement you are, the more you’ll need to put away.
Create a regular direct debit to your pension plan. You’ll soon get used the money leaving your account just like any bill – except this is an investment for your future! Even £5 a week is a small enough amount to make a difference over time.

Make extra money

We’ve got lots of ideas to make extra money online! From selling your stuff to taking surveys, there are plenty of ways to add to your regular self-employed income. Rather than spending the cash you make, put it into your pension.

Even things like cashback can help! Use a cashback website like Topcashback or Quidco when you’re buying online. Then, when you’ve earned a good chunk of cashback, pay it out – and straight into your pension pot.

Check out our Make Money section for more ways to earn extra cash for your pension.

More freelance financial tips

Pensions for the self-employed is just one of many freelance financial tips we cover here at MoneyMagpie. Whether you’re confused by IR35 or want to know how to fund your startup, check out these articles next!

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3 years ago

Great article on what is generally a confusing subject.

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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