Pension options if you’re self-employed

By independent expert Harvey Jones

It’s just as important to think about your pension if you’re self-employed as if you’re employed – but nearly half of all self-employed people have no pension savings at all.

The self-employed have to work harder to save for retirement, because they won’t get employer’s pension contributions or qualify for the new government-backed auto-enrolment workplace pension. In fact, new analysis by Prudential shows they miss out on over £90,000 of employer contributions during their lifetime and have to work hard to make up this shortfall.

Self-employed workers miss out on over £90,000 of employer contributions over their lifetime

How you save in a pension depends on your personal circumstances. So here are some likely scenarios.

Steve, 21, tech consultant

Meet Steve, 21, a recent university graduate setting up a technology company. He hasn’t made any National Insurance contributions, and has no pension.

Like many self-employed people, especially when starting out, his income is irregular. This makes it difficult to commit to a regular monthly pension payment. But that doesn’t mean he shouldn’t save.


He could start by taking out a flexible stakeholder pension, which allows him to invest from as little as £20 a month, and stop and start payments whenever he wishes.

Steve could start with an affordable amount, say, £50 a month, and top it up with the odd lump sum when he has cash to spare. As a basic rate 20% tax payer, for every £80 Steve pays into his pension, the Government will top it up to £100. That’s a real incentive to save.

The big danger is that Steve won’t bother, because at 21, retirement seems a long way off. That’s a common mistake, and a costly one.

If he invested £50 a month from age 21, he would have more than £95,000 in his pension pot by age 65, assuming annual growth of 5% a year after charges and inflation. But if he waited until age 31, his £50 a month would grow into just £53,500, roughly half as much.

Your early pension contributions are the most important, because they have longer to grow in value. Get saving, Steve!

As a self-employed worker, Steve will also pay class 2 National Insurance (NI) contributions, assuming he earns more than £5,725 a year. This means he should qualify for the basic state pension as well. From April 2016, when the new flat-rate state pension is set to be introduced, everybody will need to make 35 years of contributions to get the full amount.

Gary, 40, plasterer

Gary, 40, is a plasterer who recently became self-employed. He has made very few NI contributions, and has only one small pension, from a previous employer. He has no other long-term savings.

Again, Gary could start by taking out a stakeholder pension, which allows a minimum monthly contribution of just £20, and increase his contributions over time, when he has money to spare. Or if he doesn’t want to commit to a regular contribution, he can pay in lump sums from time to time.


Gary is a basic rate 20% tax payer, so for every £80 he pays into his pension, the Government will top it up to £100.

Gary is nervous about tying up all his spare money in a pension, because under pension rules, he can’t touch the proceeds until he is at least 55.

He should therefore consider investing some money in a flexible tax-efficient ISA (Individual Savings Account). This allows him to get at his money in an emergency (although he hopes he can leave it there for the future).
Everybody can invest up to £11,520 in an ISA in the current tax year, with all income and growth free of tax. Gary can’t afford that much, but he’s saving what he can.

He may also need to top up his NI contributions, otherwise he won’t get the full basic state pension at retirement. If he doesn’t have time to make the maximum 35 years of contributions, he can top up any shortfall with voluntary contributions.

Angela, 45, management consultant

Angela, 45, has a head start in the pensions race. She has recently become a self-employed management consultant, with full NI contributions and a healthy mix of company and personal pensions.

But Angela knows she can’t afford to rest on her laurels. Each £100,000 of pension she has at retirement will only buy around £6,000 a year annuity income. Just to get the average national salary, currently £26,500, she knows she needs almost £450,000 in her pension pot. So she is saving all she can.

Each £100,000 of pension at retirement will only buy around £6,000 in income.


Angela has set up a regular monthly contribution into a personal pension, which is boosted by tax relief. As a 40% taxpayer, Angela only has to pay in £60, and tax relief will top up her contribution to £100.

She is also using investing her full £11,520 ISA allowance into stocks and shares. She doesn’t get tax relief on the contributions, but all the growth and income is free of tax. Angela is doing well.

It pays to start saving in a pension early in life. Here’s how your pension could grow if you start investing by the age of 21, or if you leave it to 31 or 41:

Pension Pot

Somebody who starts saving £100 a month at age 21 would have £190,000 in their pension pot at age 65, assuming 5% growth a year after charges and inflation.

If they started at age 31 they would have just £107,000 at 65.This assumes £100 a month contribution and 5% growth.

If they waited until 41, they would have just £56,000.

And if they delayed until age 51, they would have £25,000.

  • Tax relief is dependant on your individual circumstances and may change in the future.