Saving for the self-employed – don’t sleepwalk into your financial future

Women carpenter in workshop

It’s a challenging time to be self-employed. While many of the UK’s self-employed have received government grants during the COVID-19 pandemic, almost 3 million people have been excluded from support and are still waiting to be eligible to claim.

That’s not all. The proportion of self-employed people who are saving into a pension has halved in the past few years, which means there’s a real danger they’re sleepwalking into an uncertain financial future.

Only 15% of self-employed are saving
Recent research commissioned by NOW: Pensions and the Pensions Policy Institute reveals the extent of the problem: only 15% of the self-employed are currently saving into a private pension, and many of those who are saving end up with a pension wealth of just 77% of the average. And, perhaps surprisingly, men are the most heavily affected.

In times of economic uncertainty, the thought of saving can feel intimidating, but now more than ever, it’s important to plan for the future. We’ve consulted some of the UK’s leading pension advisory services and have compiled some useful tips to help self-employed workers prepare themselves for retirement.

It’s time to take a (tax) break
If you’re self-employed, you won’t have an employer contributing to your pension savings through a workplace scheme. But you will be eligible for certain tax breaks.

If you earn £40,000 or less a year you can get tax relief on your pension contributions. This means that for every £100 you pay into your pension, you’ll effectively get £25 government input. If you pay a higher tax rate of 40% in England, Northern Ireland or Wales, you can also claim an additional £25 per £100 through your annual tax return.

The early bird catches the worm
The earlier you start saving into your pension, the better off you’ll be in the long term. In fact, research by the Money Advice Service shows that if you compare the retirement funds of someone who started saving at the age of 30 to someone who started with the same level of contributions aged 50, the difference would be around £45,000 at the time of retirement.   

Know your options
Most self-employed people use personal pensions, which you buy for your own use. They allow you to set how much you contribute, which is useful if your income fluctuates, and you can also choose where you’d like your savings invested.

You’ll also benefit from tax relief added on your behalf at the basic rate.

However, there are three different types of personal pension (ordinary, stakeholder and self-invested personal pensions(SIPPs)), as well as the government-created National Employment Savings Trust scheme. These all offer different benefits and terms, so it’s important to find out which works for you before committing. The Pensions Advisory Service, a free, government-run service, can help with questions about workplace, State and personal pensions.

Be prepared for a rainy day
While pension saving is crucial to help protect your financial future, remember that you can’t legally access your savings again until you reach the age of 55, except in very special circumstances. These rules are set by the government and enforced by The Pensions Regulator.

So before you invest, it’s wise to make sure you don’t leave yourself short of emergency funds for your business. 

And if you’re still unsure about which approach to take, the Pensions Advisory Service also offers a free mid-life review for the self-employed, which provides savings guidance in line with your specific work, health and family circumstances.