What is the best pension for self-employed workers?

best pension for self-employed

Finding the best pension if you are self-employed can make the difference between retiring when you have to and when you want to.

About 15 per cent of the UK workforce are self-employed, so investing in the best pension plan is key to funding their retirement. If you’re one of them, here’s what you need to know.

Most employees are automatically enrolled into a company pension scheme towards which they and their employer must contribute, but if you work for yourself, as 4.75 million people do according to data from the Office for National Statistics*,  the onus is on you to find the best personal pension to suit your needs.

However, with so many different types of pension and a wide range of providers to select from, knowing which one to choose and how much to pay in isn’t always easy. This should not deter you though, as any contributions you make into a personal pension will benefit from valuable tax relief, boosting the amount you will have to live on when you stop work.

Here are some questions to consider.

Do the self-employed get a state pension?

Yes, you will be entitled to a state pension whether you are an employee or you are self-employed. The amount you will get will depend on the Class 2 National Insurance Contributions (NICs) you have paid. You must pay Class 2 NIC if your profits are above £6,475 in the current 2020-21 tax year and you have to pay both Class 2 and Class 4 NICs if your profits are above £9,500.

How much is the state pension for self-employed workers?

At present, the maximum state pension you can claim is £175.20 a week, which is unlikely to cover most people’s outgoings, let alone provide for luxuries. So even if you are paying NICs, do not assume that the state pension will provide you with enough to enjoy a comfortable retirement. If you want financial security when you stop work you will need to work on building up a good pension pot so you can supplement your state pension income.

How to set up a pension if you are self-employed? 

There are three main things to consider when deciding which personal pension to choose:

  • Fund choice

Check which funds you can invest in, and whether there are ones that match your appetite for risk and investment goals. 

  • Charges

Look carefully at charges when choosing a pension, as these can eat into your investment growth and reduce the amount you end up with at retirement.  Ideally you should look for a pension with charges lower than 1% to keep costs down.

  • Contributions

Find out how much you can afford to contribute to your pension, and how frequently you must pay in. For example, does the scheme allow lump sum contributions as and when you can afford to make them, or must you commit to paying in a set amount each month?

What are the different types of personal pension?

The main types are standard personal pensions, stakeholder plans and self-invested personal pensions (SIPPs).

Standard personal pension

Standard or basic personal pensions usually offer funds catering for a wide range of investors with different needs and approaches to risk. Charges can vary widely depending on the provider. 

Stakeholder personal pension

A stakeholder pension could be a good option if you are just starting to save for retirement and can’t afford to pay much into your pension regularly, or you want to stop and start payments. Stakeholder plans have low and flexible contribution limits and their charges are also capped. Unless you request otherwise, your contributions will usually go into a ‘default’ investment fund designed to meet the needs of the average scheme member.

SIPPs

SIPPs usually offer a wider range of investments to choose from than other personal pensions. It’s up to you to pick the investments you want to hold in your pension, and you’ll be responsible for monitoring how they perform and making any changes. SIPPs tend to be for those more comfortable making their own investment decisions, or those who are willing to seek professional advice.

Whichever type of personal pension you choose, setting it up should be straightforward. You need to get in touch with the scheme provider and complete an application form that will state which funds you have chosen to invest in and how much you want to contribute and when. You’ll also need to provide proof of your identity, such as a passport, and proof of your address, such as a utility bill. 

Does the Government contribute to my private pension?

One of the best things about pensions is that you will benefit from tax relief on your self-employed pension contributions.

For example, if you are a basic rate taxpayer and pay £80 into your pension, HMRC will automatically boost this by £20, so that you end up with £100 in your pension pot. If you are a higher rate or additional rate taxpayer, you will get an extra £20 or £25 respectively on top of this, which you can claim back via your self-assessment tax return. 

How much can a self-employed person put into a pension?

Self-employed workers can contribute up to £40,000 a year into a pension or up to 100% of their earnings, whichever is lower. This is the same amount as someone who is employed can contribute, and is known as the Annual Allowance. 

There is also a Lifetime Allowance, which places a limit on how much you can have in your pension, without incurring extra tax. This tax year, the Lifetime Allowance is £1,073,100.

Seek advice

Specialist self-employed pension advice is vital if you want peace of mind that your retirement savings are working as hard as they can for you. 

A financial adviser can talk you through the various options available to you and ensure that your pension investments are suitable for you based on your attitude to risk and your retirement goals. They can also check that you’re not paying more than you need to in charges.

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*Data source

Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment, please contact one of Profile Pensions’ advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

Telegraph Media Group Limited is an Introducer Appointed Representative of Profile Pensions, a trading name of Profile Financial Solutions Limited, which is authorised and regulated by the Financial Conduct Authority. FCA Number 596398. Registered in England & Wales, Company Number 07731925. Registered office address: Norwest Court, Guildhall Street, Preston PR1 3NU.