Pensions for the self-employed

Don't get caught out when you retire. If you're self-employed, you might want to think about how you will fund your retirement.

Employed vs self-employed pension plans

If you're self-employed and don't have a pension then you're not alone.

According to the Office for National Statistics (ONS) survey Trends in self-employment in the UK, self-employed workers aged 35-54 are more than twice as likely to have no pension wealth than those who have an employer, with just over 45% of those who class themselves as self-employed having no pension, compared with just 16.4% of the employed.

My property is my pension

The differing attitudes to property wealth between the employed and self-employed goes some way to explaining the low pension rates among the self-employed.

According to the ONS1, 42% of self-employed workers were found to view investing in property as the safest way to save for their retirement.

This belief is reflected in the relative property wealth for those self-employed when they reach retirement; for those aged 55 and above, the share of the self-employed owning net property wealth greater than £500,000 is 28.3% versus 12.7% of employees2.

1Early indicator estimates from the Wealth and Assets Survey: attitudes towards saving for retirement, automatic enrolment into workplace pensions and financial situation, July 2016 to December 2017, ONS, August 2018.
2Trends in self-employment in the UK, ONS, February 2018.

Pension or property?

One of the attractions of property has been the seemingly unstoppable rise in house prices since the turn of the millennium.

In that time, UK house prices have outstripped the performance of the stock market. That fact, combined with property being a much more tangible investment than stocks, has led to a collective belief that house prices will continue to rise indefinitely.

Over the long term however, stocks have outperformed house prices over a 30 year period.

It's important to note that the past performance of both the property market and the stock market is not a reliable indicator of what might happen in the future. The value of both investments and property can go down as well as up so you may get back less than you invest.

Tax features of pensions and property

* More about tax relief

Tax relief is only available on the lower of the annual allowance (currently £40,000) or 100% of your earnings in a given tax year. If you exceed your annual allowance you may have a tax charge to pay unless you have unused allowance you can carry forward. If you have earnings of £110,000 or more, the amount you can pay in and receive tax relief on could be 'tapered' down to £10,000. Alternatively, if you’ve already taken taxable income from your pension pot under pension freedoms, your annual allowance may be £4,000 (known as the money purchase annual allowance) and you will not be able to use carry forward to contribute to a SIPP.

It's worth noting that the UK tax system changes on a regular basis, and the tax rules that are in place now may well change in the future. Tax treatment will depend on individual circumstances.

Self-employed pension options

State Pension

To be eligible for the State Pension you'll need at least 10 qualifying years of National Insurance contributions or credits. The State Pension alone is unlikely to maintain the lifestyle you've enjoyed before retirement, however.

If you're self-employed, you will usually need to pay your National Insurance contributions through your self-assessment tax return. The Money Advice Service has more information on the type of contributions you will need to pay, and the benefits those contributions pay for.

Self-Invested Personal Pension (SIPP)

You might also decide to use a SIPP, which allows you to decide how much you want to invest, and when. Bear in mind that you won't normally be able to make withdrawals from a SIPP until you reach age 55.

SIPPs give you the opportunity to invest in a range of investments, including mutual funds, shares, cash, exchange traded funds (ETFs) or investment trusts.

With all this choice, you may appreciate our guidance service to help you choose investments, whether you’ve invested before, or you’re just starting out.

Retirement planning when you're self-employed is likely to be quite complex, so if you're unsure about the suitability of a pension or an investment you should seek advice from an authorised financial adviser.

Fidelity's SIPP

Our SIPP comes with a low-cost service fee of just 0.35% (ongoing fund charges apply) and you can start a regular savings plan from as little as £50 per month. You can choose funds from more than 100 of the UK's leading fund managers, including Fundsmith, Jupiter, M&G and Rathbone.

If you wish to open a SIPP and you want to pay contributions from your personal or business bank account you can do so through our easy online application process. You'll need to provide some personal details and some information on how you would like your money invested.

Likewise, if you have existing pensions, you can open a Fidelity SIPP and transfer them easily into it.

If you want to make contributions through your limited company please use the application form below.

And if you want to make regular contributions through your limited company please also complete the Employer Contributions Record of Payments Due form.

This information is not a personal recommendation for any particular product, service or course of action. If you are in any doubt whether or not a pension is suitable for your circumstances you should speak to an authorised financial adviser.

Ed Monk visits a pop-up workspace for the self-employed

The way we work is changing - what impact might this have on your retirement savings?

In this video Ed Monk explores the world of the self-employed and explains why a pension might help you enjoy the same freedoms in retirement as in your working life.

Self-employed pension FAQs

How much should self-employed workers contribute to their pension?

The amount you should contribute to your pension will depend on your income, lifestyle, attitude to risk and how you would like to live in retirement.

Our myPlan tool can help you identify a savings strategy and to begin to create a plan to address some of the key risks you may face before and during retirement. The tool gathers information about your situation and roughly estimates how a portfolio similar to yours may grow over time. The tool allows you to explore changes and see the potential impact they may have on your retirement plan.

Use our myPlan tool

What tax relief can the self employed claim on a pension?

The tax relief you can claim on your pension contributions will depend on the amount you contribute and on the level of income tax you pay. Contributions to a personal pension are topped up by the government at the basic rate of 20%, so a £1,000 contribution will only cost you £800. Fidelity will claim this automatically on your behalf. For those who pay income tax at a higher rate (i.e. 40% and 45% for individuals living in the UK) you will be able to claim the additional tax relief through your tax return or by writing to HMRC. You can find out more about tax relief on our tax relief page.

If you are self-employed through a limited company and make contributions through that company, the company may be able to claim corporation tax relief. If your contributions are made through a limited company personal tax relief will not be available on those contributions.

Are self-employed workers entitled to the State Pension?

If you are self-employed, you’ll need to be paying class 2 National Insurance contributions (NIC) to ensure you qualify to receive the State Pension. The amount self-employed workers are entitled to is calculated in the same way as anyone else. You can read more about the State Pension on the Money Advice Service website or visit Gov.uk to find out how much State Pension you might get.

Read more about self-employed pensions