Self-employed and pensions: how to get started with a SIPP

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Being self-employed offers flexibility and freedom, but it can also mean long hours with little external support. Whatever line of work you are in, you are also your own HR manager, IT helpdesk and administrator.

It is perhaps not surprising therefore that pensions often slip down the to-do list. 

As a result, there is now a huge and growing gap in the pension savings between employees and the self-employed. Our own analysis found that self-employed workers could face having to work four years longer than employees due to their lack of retirement savings.

That’s why Fidelity has launched ‘No boss, no pension’, a campaign to raise awareness about the looming retirement crisis facing many self-employed workers. Over the coming months, we’ll be providing articles and insights to help entrepreneurs and freelancers to get to grips with pension saving, enabling them to wind down work how and when they want. 

In this article, we’ll cover why pensions are important to the self-employed and how to get started. 

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“My business is my pension”

You commonly hear entrepreneurs saying this phrase. However, relying on selling your business to fund your retirement is potentially a dangerous strategy. Your financial future is tied to one asset. If the business fails, underperforms, or becomes unsellable, your retirement plans would be in turmoil.

What’s more, if you fall ill or pass away, the value of the business could evaporate - leaving little to support any dependents, including your spouse. The truth is there is no real replacement for a pension. 

How to get started with a pension 

Employees are automatically enrolled into a workplace pension, but no such system exists for the self-employed. Instead, they must make a conscious effort to open a pension plan and, crucially, save into it on a regular basis.

This is where a Self-Invested Personal Pension (SIPP) can help. These flexible pension wrappers can help the self-employed build their own retirement savings.

Although the self-employed don’t benefit from an employer’s contributions, SIPPs offer the same tax advantages as any other pension. Tax relief can be claimed at the saver’s marginal rate, which can be particularly valuable for higher- and additional-rate taxpayers — especially if they expect to fall into the basic-rate band once they stop earning.

As with other pensions, SIPPs allow people to take 25% of their pot as a tax-free lump sum from age 55 (up to a limit of £268,275), though the government is raising the minimum age to 57 from 2028 (for all pension plans, not just SIPPs).

Contribution flexibility

One of the advantages of SIPPs is that they can be opened with relatively small sums, and savers have the option to pay in lump sums as well as regular contributions.

This flexibility is vital for the self-employed, whose incomes can fluctuate month to month and year to year. Rather than commit to large regular payments, many prefer to make one-off contributions when cash flow allows — for example at the end of the tax year.

The Fidelity SIPP, for example, can be started with just a £20 monthly direct debit or a £1,000 lump sum, although savers are obviously free to pay in higher sums, up to the annual allowance (usually £60,000 a year, or equivalent annual earnings if lower).

• Read: I'm self-employed - how much should I save for retirement?
• Open a Fidelity SIPP

Investment strategy

Those who already invest in a stocks and shares ISA will find SIPPs familiar. They typically operate through an online platform, allowing savers to invest across a wide range of funds.

Fidelity’s SIPP offers access to more than 2,000 funds — spanning equities, bonds, cash, commodities and multi-asset portfolios, with both active and passive choices. This range of funds offers the option to invest globally across a range of different sectors, so savers can build a portfolio tailored to their risk appetite and time horizon.

Fidelity’s list of funds largely mirrors that in its ISA. This means investors can align — or deliberately diversify — their SIPP and ISA holdings. Some SIPP investors may want to take a slightly different investment strategy, depending on their time horizon and risk profile of their SIPP and ISA holdings.

• If you’re feeling confused, read our article here on the best SIPP investments for every age.  

For many self-employed workers, it makes sense to utilise both ISA and SIPP wrappers, with ISAs offering more flexibility around access, but SIPPs offering the additional benefit of upfront tax relief on contributions.

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Don't delay

Our own analysis found that entrepreneurs could face having to work four years longer than employees due to their lack of pension savings. 

That’s because the average 45 to 54-year-old self-employed worker has just £3,300 in their pension, compared to £70,800 for the average employee of the same age.¹ 

Assuming they both earn £40,000 a year and put 8% of that into their pension, the employee could retire at 67 and comfortably spend £25,000 a year until age 100 without running out of money. 

Whereas the self-employed person would need to work another four years, to age 71, to be able to enjoy an income of £25,000 a year in retirement without running out of money by age 100. 

These estimates were calculated using Fidelity’s cashflow modelling tool, which uses various assumptions so the numbers will not be 100% representative of every case.² Even so, the difference between the two scenarios is striking. So, whatever investment strategy you choose, the key is not to put off getting started. The earlier you invest, the more time your money has to grow, which will hopefully mean a larger pension pot by the time you retire.

One of the major benefits of self-employment is being your own boss. With a SIPP, you can take the same control over your long-term financial future.

More on self-employed pension options

If you’ve got a burning question you want to ask, why not drop us a line?  Ask us your question.

Check out our other articles in this series:

• Read: I’m self-employed - how much should I save for retirement?
• Read: Pension, ISA or property for the self-employed: which is better?
• Read: Best investments for a self-employed pension - whatever your age

Source:

¹ Saving for retirement in Great Britain - Office for National Statistics

² We assumed they both achieve investment returns of 5.2% a year and that inflation is 2% a year