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How to save for retirement when you’re self-employed

When you’re self-employed and not enrolled in a workplace pension, how can you make sure you’re setting yourself up financially for retirement?

There are currently around 4.4 million self-employed people in the UK. That’s a lot of people who may be looking at retiring without a workplace pension to support them.

But there’s many other ways to build a retirement fund in a way that suits you. From personal pensions to ISAs, there are so many options you don’t need to choose just one!

What you can currently expect to receive when you retire

State Pension

As long as you’ve been paying National Insurance for at least 10 years, you should be due a State Pension when you reach retirement age, which is currently 66 years old in the UK.

However, the State Pension criteria is complicated and it is worth using the government’s State Pension forecast tool to find out how much you can expect to get.

If you’re not yet entitled to the full State Pension, it can be worthwhile increasing your National Insurance contributions as you are likely to get back more than you pay in – but only if you’re not already at the maximum you’ll receive.

The full State Pension is currently £203.85 per week, although this may have changed when you reach retirement. This can be a huge help, but it’s usually not enough for most people to keep the same lifestyle they had when they were working full time.

Employer pension (if you have worked for an employer)

If you’ve worked for an employer at any point, you’ll typically have been auto-enrolled into a pension scheme, although you may have had the option to opt out.

A percentage of the money you earn will go to a pension fund, instead of into your bank account. This happens before tax is taken so you don’t pay any tax on your pension contributions, but may pay tax when you start taking money out after you retire.

If you’re still working for an employer, you may be able to increase how much of your pay goes into your pension pot through a “salary sacrifice” scheme, meaning you’ll have less to spend now but hopefully more when you retire.

Alongside this, your employer has to pay money in on your behalf, currently at least 3% of what you earn (although this doesn’t come out of your pay). Some companies pay more and some do what’s known as “contribution matching”, which is where the company will put in more money if you do. For example you might increase your contributions from 3% to 4% and your employer might therefore increase its contributions to the same amount.

Money that the company pays in doesn’t come out of your pay so no matter how much it pays in for you, you’ll still get the same amount each month but more money when you retire.

Usually the pension fund is invested, but this will depend on which pension provider your employer has decided to use. You should be able to find this out by speaking to your employer or checking through your paperwork.

How you can build your own retirement fund

If you don’t have an employer to set up a pension scheme for you and you want to retire with more than the State Pension to support you, you’ll need to do this yourself.

The sooner you start building a retirement fund, whether you’re self-employed or not, the more money you’ll have to live on when you decide to stop working.

Here are some of the options available:

	Private pension	Cash savings account	ISA	Lifetime ISA
Do you pay tax on money you pay in?	No	Yes	Yes	Yes
Do you pay tax on growth?	No	Yes	No	No
Do you pay tax on the amount you take out?	Yes	No	No	No
How does your money grow?	By being invested in a fund that invests in stocks and shares.	By building interest	By being invested in a fund, for stocks and shares ISAs. By building up interest, for cash ISAs.	With a 25% government-funded top-up on everything you pay in. As well as by being invested in a fund, for stocks and shares lifetime ISAs. Or by building up interest, for cash lifetime ISAs.
Is the money locked away for retirement?	Yes, until the age of 55.	No	No	No, but you pay a 25% fee if you withdraw before the age of 60 (unless you’re using the money to buy your first home)
What is the best way to use it?	As your main retirement fund	As a quick-access emergency fund	As an emergency fund or add-on to your pension	As your main retirement fund or an add-on to your pension

Private pensions

When you’re self-employed, a private pension is the closest thing you can get to an employer pension.

There’s a variety of private pensions out there, also called personal pensions, and they work in the same way an employer pension would, where the money is paid in before you pay tax on it.

The main difference is that only you will be paying money in, rather than an employer also contributing.

Most private pensions follow the same rules. Any money you pay in gets “tax relief”, which means you’ll receive back any tax you’ve already paid on that money - although you may need to pay tax on it again when you start receiving your pension.

You can currently get tax relief on up to £60,000 a year paid into pensions in total. Any money you pay in over this won’t get tax relief.

You usually can’t take any money out again until you turn 55, except in special circumstances, such as if you’re unwell.

This can be a good thing, as you can’t dip into money you’ve set away for retirement. However, it can be difficult to commit to when you’re self-employed, as you could have periods of lower income where you need savings to keep you afloat.

Cash savings accounts

If you think you might want to access your retirement fund before the age of 55, a cash savings account could be a good option. However, you will miss out on the tax relief you’d get with a pension.

Within the rules of the account, you can pay in as much money as you want, whenever it suits you, and you can take it out in an emergency or if you decide to retire early. You’re also likely to receive interest on your savings (depending on the savings account you choose).

It’s worth bearing in mind that this means you could find yourself dipping into your retirement fund more than you’d planned to.

It’s worth keeping in mind how inflation could affect the value of the money you save. While you can’t lose money with cash savings, that money might be worth less when you reach retirement if inflation (how much things cost) goes up faster than the account’s interest rate.

ISAs

As with cash savings accounts, anything you pay into an ISA doesn’t get tax relief so you won’t get back the tax you’ve already paid on that money.

However, you won’t pay any tax on any interest or returns, no matter how much your money grows by. Whereas you may need to pay tax on money you make in a cash savings account, if you make more than your Personal Savings Allowance (which is £1,000 a year for most people).

This makes ISAs a good option if you’re looking for an additional retirement fund and think you might earn more than your Personal Savings Allowance in interest or returns.

You can put up to £20,000 in ISAs a year, whether you choose a cash ISA or stocks and shares ISA.

You can withdraw money from an ISA if you need to, but it can take longer to do this than withdrawing from a cash savings account. So there’s more time to think about it if you’re considering taking money out.

Having a cash ISA or stocks and shares ISA as well as a private pension can be a great way to boost your retirement income while still giving you the peace of mind that you can use that money early if you need to.

This can be a relief if you’re self-employed and happen to have a few slower months in terms of income.

Lifetime ISAs

Much like standard ISAs, lifetime ISAs shouldn’t be used to replace a pension but they can give your retirement fund a boost.

Again, you won’t get tax relief but instead you’ll get a 25% government bonus on top of everything you pay in. If you pay basic rate tax, that’s likely to be more than the tax you’ve paid on that money.

You can pay in up to £4,000 a year so there’s £1,000 of free money available every year.

The catch is that if you take any money out before you turn 60 you’ll need to pay a hefty withdrawal penalty fee (unless you’re using that money to buy your first home).

You need to be aged between 18 and 39 to open a lifetime ISA, so it’s not an option for everyone. Once it’s open, you can keep paying money in until you turn 50.

So, if you open a lifetime ISA at the age of 30 and max out your £4,000 limit every year until your 50th birthday, you’ll get a £20,000 bonus in your retirement fund on top of the money you put in!

Lifetime ISAs are available as both cash and stocks and shares accounts:

Cash lifetime ISAs build interest, like current accounts do. As with cash savings accounts, you need to be aware that the same amount of money might buy less in the future because things will likely cost more.

Your money will build interest, but unless the interest rate is higher than inflation (the rate costs go up by), you might find the value of your savings is lower when you retire than it is now.

Stocks and shares lifetime ISAs don’t earn interest, instead they invest in funds that aim to make money by being invested in the stock market. This gives them higher potential to grow by more than interest rates and more than inflation so you could end up with more money when you retire than you would have if you’d chosen a cash lifetime ISA or savings account.

However, there is a risk that the value could go down as well as up so you could end up with less money.

You can find out more about the differences between saving and investing in our ‘Is it better to save or invest your money? analysis article.

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Our Lifetime ISA

Our Lifetime ISA invests in stocks and shares. This means it has good long-term growth potential, but the value of your investments could go down as well as up so you could end up with less money than you've put in.