Do I need a pension? Essential pension basics for the self-employed

By Rupert Lovesy

Whilst most people in employment will automatically be enrolled into a work pension scheme and have access to advice, those who are self-employed won’t enjoy the same arrangement.

As a result, many self-employed people make very little provision for their retirement or believe that the state pension, downsizing their home or selling their business will fund their retirement.

In this Focus on Pensions piece, Castlefield Head of Client Engagement and Advice, Rupert Lovesy gives guidance on essential pension basics for self-employed people.

What is a Pension?

A pension is a tax-efficient savings plan, designed to provide you with an income for when you want to retire. For self-employed people, managing a pension involves setting up your own savings and investment strategy, as you do not have an employer contributing to your pension. However, there are many benefits of planning for retirement and advantages of contributing towards a pension if you are self-employed.

Types of Pension

There are two main pension options for the self-employed:

  • Stakeholder pensions – basic products with default strategies and capped charges, making it easier to self-select and start building a simple fund from scratch.
  • Personal Pensions / Self-Invested Personal Pensions (SIPPs) - offering a much broader range of investment options and greater control over how money is invested, making ethical investment options accessible, but usually requiring professional financial advice.

Benefits of Contributing to a Pension

  • Tax Relief: Contributions to your pension are tax-deductible.
  • Growth: An investment-based pension fund has more potential to outpace increases in the cost of living than simply saving cash in a deposit account, which will typically lose value in real terms over time.
  • Security in Retirement: Having a pension can provide you with a steady income once you stop working.

You may be aware of the announcement in the Autumn Budget Statement that pensions which are currently exempt from inheritance tax will no longer remain outside of a person’s estate for inheritance tax purposes from 2027. This has no impact on the effectiveness of pensions for providing income in retirement, as the change only affects pension funds which remain unused at the end of your lifetime.

Maximising your Pension Savings

  • Start Early: You could be retired for almost as long as you were working, so an early start is essential to give you choices in retirement.
  • Make Regular Contributions: Even small contributions add up over time and consistency is really important.
  • Take Advantage of Tax Relief: Ensure you’re claiming all the tax reliefs available to you – essentially, pensions allow you to save paying tax on income you are not spending and in many cases to defer it to when your tax rate is likely to be lower.
  • Invest Wisely: Diversifying your investments to spread risk and maximise growth is really important – the amount of risk you take should reduce as you approach the time you might want to take your pension.

Taking Your Pension

Unlike the state pension and many occupational pensions, you can take your own pension whenever suits you from age 55 onwards (57 from 6 April 2028). You don’t have to take it all in one go or buy an annuity (secure income) with the fund, so it is really flexible. 25% of your pension fund (up to £268,275 maximum) can be taken completely tax-free, with the remainder taxed as your income, however you take it.

Things to consider

Relying on the State Pension: Could you really live on £221.20 a week (assuming you have sufficient years of National Insurance Contributions for a full state pension)? This is really intended to fund a very basic subsistence rather than a comfortable retirement.

Downsizing your Property: While selling a property can provide a significant lump sum, it’s not always a reliable or predictable source of retirement income and your eggs are very much in one basket. Property values can fluctuate, and the process of selling a property can take time.

Selling a Business: Counting on selling your business to fund your retirement can be risky. The market conditions at the time you plan to sell may not be favourable, and finding a buyer might take longer than expected, especially for a small business, where you are perhaps the most valuable asset. It’s crucial to have a well-diversified retirement plan that doesn’t rely solely on the sale of your business.

Further Information

  • You can read more on the government’s Money Helper
  • If you feel you need help working out how much you will need in retirement, how much you need to save each month and choosing a product and investments, consider taking financial advice from a professional.

Conclusion

Taking control of your pension as a self-employed individual may seem daunting, but with careful planning and regular contributions, you can secure a comfortable retirement. Start early, make informed decisions, and regularly review your progress.

If you have any questions or need further assistance, feel free to ask – we’d be happy to discuss our services with you and give you a guide to costs.

Written by Rupert Lovesy

 

This document is intended for information purposes only and it does not constitute a personal recommendation or inducement to invest. It is based on information obtained from sources which we believe to be accurate but the accuracy of which we cannot warrant and may be subject to change at short notice, therefore we cannot be held responsible for the implications of relying on this information. The contents of this document are not intended to be construed as legal, accounting, tax or investment advice. With any investment your capital is at risk. You should seek independent financial advice if you are unsure whether an investment product is suitable for your personal financial circumstances and appetite for risk. Unless otherwise stated this information is accurate as at 16/01/2025.