Self-Employed Pensions – What should you be doing?

Self-employed persons don’t care much about their pension and they easily forget that they have to create a pension for their future. State pension may pay you just £8000 a year and due to rapid changes in the retirement age, it becomes increasingly important to make plans for your future. Pension is complex topic to deal with, if you have not considered something like this before.

What is a Pension?

A pension is an amount of money paid by the government to a person regularly after completing his or her tenure at work. After your retirement, you can easily withdraw money from the pension pot you saved for your future. You can start doing this from the age of 55 and above. In exchange for an annuity, you can sell the cash to an insurance company which gives you continuous income until your death.

Why are Self-Employed Pensions important?

Self-employed pensions are important because of the following reasons –
  • State pension will only cover your basic needs. As it covers less, it becomes important for you take care of your self-employed pensions.
  • It is not guaranteed that state pension rules will remain the same, so it is important that you find a suitable option for you to secure your future after retirement.
  • Many peoples may live a long life for which they need more money to support themselves in retirement.
  • As per pension rules, if you die before the age of 75, your pension scheme can be given to your family members or in relations as a lump sum. Inheritance tax deduction cannot apply.

Who pays into a Pension?

In case you are a self-employed person, it becomes your responsibility to tell the government that you are self-employed, avail the government pension schemes and pay into your pension account. The government also offers relief on the basis of tax contributions. The reliefs are given by the government depending upon the slab you are lying into –
  • In case you are a basic rate tax payer, £100 of tax contribution will only cost you £80. Here, £20 is the amount of tax relief.
  • In case you are lying into higher rate tax payer slab, £100 of tax contribution will only cost you £60. Here, £40 is the amount of tax relief.
  • In case you are an additional rate tax payer, £100 of tax contribution will only cost you £55. Here, you will get £45 as tax relief.
National insurance contributions will go towards your state pension. You can also calculate your state pension age by using the state pension age calculator.

Does Auto Enrollment apply to Self-Employed?

Automatic enrollment option is not applicable on self-employed individuals. In case you don’t have an employer, it is important that you should think about creating your own retirement funds and the most efficient way of doing the same is to start your pension today itself.

Self-Employed Pension Options

There are different types of pension schemes you can opt for. The same are given below –
  • National employment saving trust (NEST)
  • Self-invested personal pensions (SIPP)
  • Personal pensions
  • Stakeholder pensions

What is a Personal Pension

Personal pension is a pension not paid by the employer but arranged and paid by the person himself. It is a good way by which you can save money for your retirement. It is the most common substitute for workplace pension. In case of personal pension, you make payments into your pension account regularly and they are classified as a defined contribution pension. Your pension payout will differ on the basis of the amount you paid in, performance of your pension investments (goes up & down) and mode of pension payment. In case of personal pension, you choose a provider and then take the decision that how you want to pay your contributions.
How to Pay Personal Pension Contributions
You can make payments to personal pension account regularly or by paying a lump sum amount. Some of the providers require a minimum payment to ensure that whether you can afford to pay regular contribution to your personal pension account. You can save any amount towards retirement as there is no limit imposed on the same. There is a limit imposed on the tax relief amount. You can contribute 100% of your annual earnings before tax up to £40000. In case you are earning more than £50000, your contribution amount is reduced by £1 for every £2 earned over £150000 until the tax relief limit reaches £10000.
Choosing a Personal Pension Provider
Make sure that your personal pension provider is registered with the financial conduct authority (FCA). They are the conduct regulator for 56000 financial services firms in the UK. It also gives you a clear picture about the service provider and tells whether your chosen provider has a reputation. You can also go for independent financial advice in case you are not sure that which type of personal pension will suits you. You can take advices from bodies like the pensions advisory service. You can also take personal advice from professional accountant too.

Differences between Personal Pension & Self-Invested Pension


Personal Pension Self-Invested Pension


Less investment flexibility More investment flexibility


The contributions are invested in the range of funds offered by the pension provider. In this case, you are having freedom to choose your own investments.
SIPP Investment Options
With the help of self-invested pension plan, you can avail greater range of investment options. The options are given below –
  • Quoted stock and shares both in UK and overseas.
  • Unlisted shares.
  • Investment trusts.
  • Collective investments like OEIC’s.
  • Property and land insurance bonds excluding the most residential property Corporate bonds etc.
Self-invested pension plan is only suitable for more experienced investors who are comfortable in taking involved decisions on the investments made by them.
Withdrawing a SIPP
Withdrawing a SIPP means the money you withdraw at the time of retirement will be impacted by the amount you paid into the scheme. Amount of SIPP depends upon many other factors such as for how long the money has been invested, time period of investment returns etc.

What is a Stakeholder Pension

Stakeholder pension is another form of defined contribution pension and it is based on sets of minimum standards defined by the government. The main objective for setting these standards is to make stakeholder pension –
  • Simple
  • Affordable
  • Easily available to persons having lower incomes

Why Choose a Stakeholder Pension

Choosing a stakeholder pension has various benefits but one of the key benefits of opting stakeholder pension is that their minimum contribution is low & flexible. Stakeholder pensions also include capped charges to make them affordable for lower income groups. These charges are capped for first 10 years at 1.5% per annum. After completing 10 years, it is capped at 1% per year. In addition to it, stakeholder pension also include a default investment strategy. In comparison to personal pension schemes, fewer investment options are available in stakeholder pension scheme.

How to Pay Stakeholder Pension Contribution

Any person under the age of 75 years can contribute towards a stakeholder pension scheme. You can invest minimum £20 per month and maximum £3600 per year (including tax relief) There is no penalty imposed for changing your contributions, stopping them or transferring them to another scheme. It is very useful for self-employed persons who are having irregular incomes.

Choosing a Stakeholder Pension Provider

Make sure that stakeholder’s pension provider is registered with pension’s regulator like FCA in case of personal pensions.

What is the National Employment Saving Trust (NEST)

National employment saving trust is a pension authority set up by the government at the work place. Their main aim is to prepare companies for auto-enrollment. National employment saving trust recently added option for self-employed individuals too.

Why Choose a NEST Pension

NEST pension scheme is quite flexible. In case you joined as a self-employed person but later becomes an employee under some other firm, you can continuously contribute towards the same retirement scheme. If in case your employer uses NEST, then he can also contribute towards the same NEST retirement fund. In case you are moving from employed to self-employed, you can make updation to your NEST scheme and continue to pay into that scheme.

How to Pay Nest Pension Contribution

There are various modes to pay NEST pension contributions online. The payments can be made by direct debit or a debit card. You can pay as much as you like above the minimum contribution amount of £10. In case your contribution exceeds the annual allowance, you may have to pay extra tax in other pension schemes whereas in NEST all your contribution will stay in your pension account till your retirement date reaches.

NEST Pension Charges

There is no set up or ongoing admin fees is applicable in case of NEST pensions whereas there are some charges for members which are given below –
  • 1.8% of each new contribution made to the pension account as a contribution charge.
  • Maintenance charge of 0.3% on pension’s total value annually.
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