If you’re self-employed, saving into a pension probably isn’t at the top of your to-do list. You’re more likely to be focused on the day-to-day challenges of running and growing your business. You might also think pensions are for employees who have a regular stream of income.
But with the cost of retirement much higher than it used to be, and the state pension only providing a modest income1, saving into a pension is a crucial step to a comfortable and fulfilling retirement. Even better, personal pensions come with a host of benefits that make them particularly well-suited to the self-employed.
Here are five reasons to consider saving into a pension if you’re self-employed.
1. A pension gives you more control
Our analysis of the most recent Office for National Statistics (ONS) data2 found that only 15% of self-employed people have personal pension savings. In addition, just 21% of self-employed people expect workplace or personal pensions to be their main source of retirement funding compared with 49% of employees.
Anecdotally, self-employed people often think of their business as their ‘pension’ and plan to sell it in the future to fund their retirement. However, relying solely on your business to fund your retirement is a risky strategy. If your business is difficult to sell or is worth less than you expected, it could jeopardise your retirement plans.
Although you won’t benefit from auto-enrolment into a workplace scheme, it’s still possible to take control of your retirement. By opening your own personal pension, you can start building wealth that isn’t tied to your business. You can also benefit from the incentives that pensions offer (more on that below).
An important point to bear in mind is that your pension money will be invested. Investments tend to go up and down in value, which means your pension could go down as well as up and you may get back less than you invest.
2. Personal pensions are a flexible way of saving for your future
With a personal pension, you can choose how much and how often you pay into it. This makes personal pensions useful for those with irregular income. You could pay into your pension each month and vary that amount as you see fit. Or you could add a lump sum when you have more clarity over your business’s cashflow for the year.
Unlike a workplace scheme, you also have the freedom to choose a pension that suits your needs. You might want to build your own pension portfolio or prefer a provider who can select investments for you. Other things to look out for include good customer service and low fees. Costs eat into your investment returns, so the lower your total costs3, the bigger your pot will be.
3. Paying into a pension is tax efficient
Paying into a pension is a tax-efficient way of saving for retirement.
If you’re set up as a sole trader or partnership, you can make personal contributions to a pension and benefit from tax relief from the government. Under current rules, for every £80 you pay into a pension, the government will add £20, boosting your contribution to £100. Higher- and additional-rate taxpayers can claim a further £20 and £25, respectively, via a self-assessment tax return. There is an annual limit on how much you can pay into a pension and still get tax relief. Currently, this is the lower of £60,000 or 100% of your gross relevant earnings4.
If you’re a limited company director or shareholder, contributions are made from your business account. They’re treated as an ‘allowable business expense’, which means they could reduce your corporation tax bill5. What’s more, employers don’t currently pay national insurance (NI) on pension contributions. The NI rate for 2024-25 is 13.8%6, so a director could save this amount by contributing directly into their pension rather than taking it as salary.
As a director, you won’t face the same salary restriction on pension contributions that sole traders do. Contributions are tax-free up to £60,000 a year, even if your salary is less than £60,000 (as long as the company’s pension contributions do not exceed its annual earnings).
4. Pensions are a flexible way of funding retirement
Pensions also offer flexibility when it comes to funding your retirement. There are several options to choose from, so you can find the option that suits your needs and preferences.
With flexible income drawdown, you can take up to 25% of your pension as tax-free cash (currently capped at £268,275) and leave the rest invested. You can then draw the income you need and change this amount whenever you want to.
This differs to an annuity, which provides a guaranteed income. An annuity provides more certainty, but once it is set up, you can’t change your mind and you can’t increase or decrease the amount of income to suit your needs. Another option is to take a series of individual lump sums, where 25% of each lump sum is tax-free and 75% is taxable.
It’s also possible to use a combination of options, which adds further flexibility. Find out more about withdrawing your pension money.
5. Opening and managing a pension is simple
Opening and managing a personal pension is easier than you might think. If you’re a sole trader, you can set up a pension plan quickly and start contributing to it right away.
To make contributions from a business account, you’ll need to be a registered director or shareholder of that business. If you open a pension with Vanguard, we’ll verify your company and check how many shareholders you have, which can take a couple of weeks. During this process, you can make one company pension payment. Once your company has been verified, you can make lump-sum payments using a company debit card (you can’t make transfers by direct debit, standing orders or bank transfers).
When it comes to investing your pension savings, you can build your own portfolio from our wide range of low-cost funds. Or you can keep things simple with one of our Target Retirement Funds. These are ready-made retirement portfolios that mature with you, so you don’t have to worry about adjusting your investments as you get closer to retirement. If you want more of a helping hand, our managed service will select investments for you based on your attitude to risk, which is similar to a workplace scheme selecting investments on behalf of employees.
Saving into a pension isn’t just about securing your future; it’s also about taking control of your financial wellbeing. The sooner you start, the sooner you can enjoy the peace of mind that comes with knowing you’re prepared for retirement.
1 The full state pension is currently £11,500 for the 2024-25 tax year.
2 ONS Wealth and Assets Survey, 2018 to 2020.
3 Costs may include account/platform fees, management fees and fund management costs (including day-to-day management costs, admin expenses and fund transaction costs).
4 For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual. Your annual allowance might be lower than £60,000 if you have a high income or you’ve already flexibly accessed your pension pot. To work out if you have a reduced (tapered) annual allowance, see HMRC’s website. If you’ve flexibly accessed your pension, you can work out what your alternative annual allowance is here.
5 For a company pension contribution to be an allowable business expense, it must pass the ‘wholly and exclusively’ test. This means that HM Revenue & Customs (HMRC) must deem the contribution to be wholly and exclusively for the employer’s trade or profession. HMRC may want to establish whether your total remuneration, including pension contributions, is reasonable for the work being done.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55, rising to the age of 57 in 2028.
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