Self-employment in the UK continues to grow as more people opt for the flexibility and freedom of working for themselves.
There were some 4.39 million self-employed workers in the UK in 2023, accounting for around a sixth of the workforce. While the figure was down from a peak during the Covid-19 pandemic, it has risen from 3.4 million in 1998. But with greater flexibility comes more responsibility too, especially when it comes to finances – and particularly with regard to pensions.
A recent Scottish Widows study found that four in 10 self-employed people will fall short of even the minimum standard of living, equivalent to £14,400 a year for a single person. Just 31% of self-employed workers save into a pension, says the Association of Independent Professionals and the Self-Employed.
If you’re self-employed or thinking about going down that track, here are a few pointers to help ensure you don’t get left behind financially in later life.
Be your own boss
While running your own business or being freelance has many perks, the practical financial provisions are no longer organised by an HR department. As a self-employed worker, you are solely responsible for your own pension provision.
The good news is that you are entitled to all the same tax reliefs on pension contributions as employed people. This means you get a tax top-up when you contribute to your retirement pot, at your marginal income tax rate So, every £800 paid in by a basic-rate taxpayer, for example, will result in a contribution of £1,000. Higher-rate taxpayers can claim back an additional £200 through a self-assessment form, boosting their return even higher. This means your money can grow free of tax for decades.
Weigh up your options
The main pension option for the self-employed is a personal pension. This can come in the form of an ordinary personal pension, a stakeholder pension (where there’s a cap on charges) or a self-invested personal pension (Sipp), which will offer more investment choice but typically come with higher charges.
You could also join the Nest scheme, a trust set up by the government and run by the Nest corporation. While self-employed workers remain excluded from automatic enrolment, they are eligible for the Nest scheme, subject to eligibility.
Earlier the better and better late than never
These tax breaks are unrivalled. So even if things are tight, it is better to save something rather than nothing. The golden rule is that the earlier you save, the more time your money will have to grow. Saving just £100 a month from the age of 25 would result in a pension pot of £152,602 at the age of 65, based on annual investment growth of 5%. Delaying retirement savings until age 30 would see the fund value at 65 drop to £113,609 and leaving it until age 40 would mean a fund value of £59,551.
Some might feel put off by the fact saving in a pension means locking their money away until the age of 55. It might appear more appealing to save in a place where your money isn’t under lock and key. In a tax-free Isa you can save a maximum of £20,000 – in the current tax year – and access the money whenever necessary. But remember, the trade-off for locking up your cash until 55 is the generous tax breaks on contributions. The best approach is to pay into an ISA as well as a pension, if you can.
How to set up a Sipp
You can find the best value Sipp provider using the comparison service on this website. There are plenty of providers to choose from, including Fidelity, AJ Bell and Hargreaves Lansdown. Opening the account will require some quick form-filling. You’ll need your national insurance number and all the other usual details — name, address and date of birth.
Once the account is open you can fund the account with a lump sum via debit card or set up a regular direct debit from typically £25 a month. Don’t forget, in years to come, make sure you review and increase contribution levels when you can.
Take a broad view
While pensions are important and valuable, they’re not the be all and end all. Ideally, self-employed workers would pay into a pension and an ISA, as well as making the best of any business assets they have.
In fact, the flexibility of self-employment can be an advantage here. For instance, your pension or investment contributions could be arranged to reflect your income, which might well fluctuate between months and years. Some might find it easier to pay in lump sums every few months – perhaps when their earnings are highest – rather than contributing a set amount every month.
Photo by Denny Luan on Unsplash
