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Pension for Self-employed

Tamires Criscio
Tamires Criscio
  | Edited by Tom Church
Updated 29th April 2021

Are you a self-employed worker? Are you interested in learning more about pensions for self-employed workers? If yes, Latest Deals is here to help you to understand why it’s important to have a pension and how to get one if you are self-employed.

Can a self-employed person get a pension?

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If you are a self-employed person you have the same rights as a person that has a full-time or part-time job. 

By law, you are entitled to receive a state pension as long as you have contributed to National Insurance for at least 10 years. How much you receive depends on how much and how long you contributed for.

You won’t have a workplace pension, because you are not an employee, but you can set up a personal pension besides your state pension. 

Is it important to have a pension as a self-employed person? 

It’s very important to have a pension.

Having a pension is a guarantee for a future with more financial stability and comfort. 

Employers are obliged to enrol their employees into a workplace pension scheme, while self-employed people aren’t. 

Self-employed pension contributions: why start saving?

As a self-employed person, you don’t know how long you will be able to keep doing your job and even if you want to keep working, therefore having a pension is a safety net. 

You need to think about the future as the better you are prepared, the better you can live. 

You never know what can happen and you want to make sure you have the means to live well and in comfort. 

State pension for self-employed workers

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Everyone in the UK that receives a salary must pay income tax and National Insurance.

As a self-employed person, you work for yourself and every year you need to submit your self-assessment tax return form. 

Learn more about how to submit your self-assessment tax return form. 

In this document, you will know how much you need to pay for income tax and National Insurance according to how much money you have made that year. 

By paying for National Insurance, you have the right to receive the state pension, which at the moment is £179.60 a week (value according to the tax year 2021/22). 

Learn more about how state pension works in the UK. 

You don’t need to do anything extra, just make sure you are paying for National Insurance for at least 10 years to receive the minimum payments or for 35 years to receive the maximum payments. 

Workplace pension for self-employed workers

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If you are self-employed, you can now enrol at NEST (National Employment Savings Trust). Before, this was restricted to only employers, but now the self-employed can enrol as well. 

NEST is a workplace pension scheme set up by the UK government. This workplace pension is used by many employers in the UK because it’s easy to use for both employers and employees. 

To see if you are eligible for a NEST pension, you can check this page. You will need to fill the checklist criteria to be able to open an account with NEST.

You can set up your workplace pension online on NEST’s website. If you need to call NEST, use this number: 0300 020 0090.

NEST works like any other workplace pension: 

  • You can only take the money out when you reach 55 years of age. 
  • You may be able to get tax relief of 20%.
  • You can get tax relief on up to £40,000 per year (value according to the tax year 2021/22).

NEST has cheaper charges and accepts low monthly contributions, but the returns can be lower compared to other pension providers. Note - there are other alternatives available, including doing it yourself via a Self-Invested Personal Pension (SIPP).

IMPORTANT NOTE: NEST can be an excellent option if you don’t know where to start. This is a pension set up by the UK government so you can be secure that your money will be protected. Also, this pension is very easy to set up and to use daily. 

You can always start here and move your pension to another provider in the future when you have more knowledge on how to save for retirement and when you are looking for more profitable options, for example. 

Personal pension for self-employed workers

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If you want more options than your state pension and a workplace pension, you can get a personal pension. 

It’s easy to find a personal pension, but it’s important to keep in mind that there is more than one type of personal pension. We will talk more about each of them below: 

  • Standard personal pensions

These are very common and you don’t need to do much. 

Once you have picked your standard personal pension provider, you will open an account with them. 

Then you just need to make sure that you are put in money with frequency, ideally monthly. 

This works just like a savings account but instead of leaving your money “resting” at a low-interest rate, your money will be working for you with much better interest rates. 

The standard personal pension provider will use your money to invest in different types of funds and make a profit from it and share it with you. 

This type of personal pension is usually pretty safe as you can invest in many funds with a low-risk level. 

This will allow your money to grow better than if you just leave it in a regular saving account. 

When you set up your account you can choose what risk level you want, also your provider will manage it according to your age. 

Your personal pension provider will also claim the tax relief for you and add it directly to your pension savings. So when you put £80, the government will add £20, then you will have £100. 

  • Stakeholder personal pensions

This is a better option if you can’t afford to put money into your personal pension with a regular frequency. In this type of pension, you can stop and start payments at any time. 

  • SIPPs - Self-invested Personal Pensions 

The third and final option are SIPPs. On these pension schemes, the account holder is the person responsible for managing the investment portfolio. On the first two, the portfolio is managed by professionals. 

We have an entire guide just about this type of pension. You can learn more about it here. 

Lifetime ISA (LISA) for self-employed workers

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Another option is to open a Lifetime ISA (Individual Savings Account). You can use this money to either buy your first home or for your retirement. 

In this account, you can put in up to £4,000 per year until you are 50 years old. 

You also need to put your first payment before you are 40 years old. 

The government will add every year a bonus of 25%, up to a maximum of £1,000 per year. 

Learn more about Lifetime ISA here.

What is the best private pension scheme for self-employed workers? 

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The best pension plan for self-employed workers is the one that best fulfils your needs. When you are shopping for a private pension scheme you need to see if they offer a good fund choice with different risks levels. You also need to check all the charges you might end up paying. You also need to check how often you can put money in and how much the minimum payments are. 

Self-employed pensions: how much should I save?

Only you can answer that because this depends on two things: how much money can you afford to put aside and how much money you want to retire with?  

  • The older you are, the more money you need to save. 
  • The younger you are, the less money you need to save. 

Ideally, a person should retire with 20 to 25 times their annual income.

For example, if your income is £20,000 per year, you will need from £400,000 to £500,000 on your pension pot. That way you can keep the same lifestyle even if you don’t work. 

Specialists also recommend saving at least 15% of your monthly income for your retirement. 

For example, if your income is £20,000 per year, you will need to save £216 per month. 

You can also combine more than one pension type to get these. For example, with a personal pension and a Lifetime ISA. 

IMPORTANT NOTE: Remember that you will have a state pension that’s around £9,000 per year at the moment. Also, keep in mind that you won’t need to save anymore as you will be retired. 

FAQ 

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