Setting up a pension when you’re self-employed

I am extremely passionate about sharing my personal finance knowledge and experience with the world. I want to explain potentially scary and complex subjects in a simple way, always using terms that are easy to understand. And there are few more confusing topics than pensions.

Do Pensions Fill You Dread?

Let’s face it, the word pension fills most people with fear and dread. Particularly the self-employed. According to a recent ITV Tonight survey* one in four of the 2000 people surveyed were not saving enough for their retirement. Freelancers and self-employed people will make up a lot of this statistic. There is no auto-enrolment into the workplace pension scheme of your small business.

Not only is it down to self-employed folk to sort out their own pension, it can also be challenging to get advice. Most financial planners won’t consider you as a client unless you have £100 to £150k in assets to place in investments or pensions.

Setting up a pension when you’re self-employed

My Twitter Poll

I did my own Twitter poll. I asked my self-employed followers if they had a pension, either a private pension that they had in the past or were now contributing money into.

41 people answered and worryingly 46% of the respondents said that they didn’t have a pension. In conversations with industry experts, they actually fear this statistic to be worse, and worry that it will continue to worsen as the freelance/gig economy continues to grow.

Setting up a pension when you’re self-employed

Some Statistics About the State Pension

The current state pension (2019/20) is £8,546 and this can be drawn at the age of 65 for men. It is also gradually increasing for women from 60 to 65. (You get this provided you have contributed national insurance for 35 years, check your progress here on the government website).

This is due to rise, and we don’t know to what age level the government might take it to. The population is dying at an older age so the state pension age will go up as well. A two-year increase to the state retirement age will save the government an estimated £76 billion* over a decade. Given the pension crisis we are in, this is inevitable.

The state pension costs the UK economy a huge £111billion* per year and we simply do not know what the government might decide to do in the future with pensions. It might be removed altogether, which while an extreme view is possible.

This makes it all the more important to save into your own private pension plan. It is NEVER too late to start saving, but the younger you start the more you benefit from compound interest. Faith from Much with Less explains the wonder of compound interest brilliantly.

So, what is the Best Pension for the Self-Employed?

Many of us have been employed for some part of our career. This will hopefully mean that you have already got some private pension in a pot, or various pots.

When I left the employed world back in 2015 I had £42k saved up in my pots. I consolidated these with PensionBee. And got a huge sense of reassurance knowing what I had in my pension pot and knowing that I could add to it as and when timing was right.

PensionBee did all the work to chase down my pension money and actioned the transfers for me at no cost. Both of my old pensions allowed for free transfer of the money to a new provider but sometimes there are transfer fees – although PensionBee will always let you know what this fee is before taking action.

There is often a break of pension contributions when moving over to self-employment. I waited 3 ½ years before I restarted my contributions and what a feeling that was to be able to prioritise my pension contributions again. I now put 10% of my turnover straight into my pension pot direct from my limited company.

The beauty of saving with PensionBee is that there are no minimum contribution amounts – you can save any amount into your pension, as often or as little as you like.

Contributing to a Pension Gives you Free Money!

If you are self-employed pensions are a wonderful tax break. For every £1 you put into your pension the government will give you an extra 25p. If you are a higher rate taxpayer, the government gives you even more!

If you have a limited company, like I have, the pension contributions are taken as cost to the business before corporation tax is paid.

I am now 42 and (scarily) aware that retirement, and the age I can access my pension is only 13 years away so I am happy to lock my money away for a period of time to benefit from the tax bonus along with investment returns I get. Yes, it is locked away until the age of 55.

How Much is Enough?

As an estimate a private pension pot of £350k is going to give you an income of £9k per year. Is this enough to let you live a comfortable life in retirement? Is £173 per week enough to let you live the lifestyle you want to live in later life?

I am on track to have enough saved for a comfortable retirement, whenever I chose to draw that money. Are you on track? Try out PensionBee’s pension calculator to find out for yourself.

Disclaimer and Sources of Data

Please be aware that any form of investment can go up and down and you may want to consider advice from a qualified IFA. Just make sure they are recommended by a trusted friend and check their investment levels as some will only work with clients with an investment level of at least £150k. This post was written in collaboration with PensionBee.

*All stats quoted come from the ITV Tonight TV show Pensions-Are you Saving enough first shown 10th May 2019. Except my Twitter Poll which is from Mrs Mummypenny Twitter.

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Lynn Beattie

Aka Mrs MummyPenny

Personal Finance Expert

I write about personal finance made simple, lifestyle choices that will save you time and money, as well as products and services that offer great value.

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2 Responses

  1. Good post!
    Investing for the future is so important and as you highlight there are tax advantages when using a pension.
    The state pension is so small it is not worth relying on, think of it as a bonus if it is still there when we retire. I mean £8,546 a year will only provide a basic retirement, not an enjoyable one!
    In 2028, the age you can access your private pension will rise to 57.
    Unfortunately that means you will have to wait 15 years. 🙁
    It will probably be worse for me and rise into the 60s before I get there…

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