The best options for your self-employed pension

Lisa Caplan

3 min read

If you work for yourself, a self-employed pension will make your money work for you.

self-employed pension

Being your own boss is big business in the UK, with thousands more people every year joining the ranks of the self-employed, but research shows that many self-employed people are wary of investing in a pension. The good news is that it’s more straightforward than you might expect and there are big tax advantages as well. Here’s the low-down on how to save for retirement with a self-employed pension.

Self-employed people aren’t putting money aside for the future

4.5 million people in the UK are self-employed and that number is likely to increase in the future. Working for yourself involves managing your own finances – including arranging your own self-employed pension. Research this year shows that, for many people, it’s way down the list of priorities. Just 17% of the self-employed workforce is currently contributing to a pension.

Research by Citizen’s Advice gives some clues to the reasons why people are not investing. There is widespread confusion about the advantages of contributing to a pension; seven in ten people don’t understand the tax breaks they provide. The research also shows that many self-employed people don’t realise that most pension plans are very flexible. Self-employed incomes tend to fluctuate, making it vital to have the option to pay less or stop paying altogether during periods of lower income and have the option to pay in more at times of higher income.

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Why you should have a self-employed pension

A pension offers a better deal than many self-employed workers realise. You might not have an employer making contributions, but you still get Income Tax relief. This means that, if you’re a basic rate taxpayer, for every £100 you contribute the pension provider will claim an extra £25 from HMRC and add it straight into your pot.

It’s also wise to start early. Paying into your pension might not seem like your most pressing priority but the longer your money is invested, the more it benefits from compound returns.

Where to put your money

There are two main types of personal pension scheme: stakeholder pensions and Self Invested Personal Pensions (SIPPs). Here are the pros and cons of each for your self-employed pension.

Stakeholder pension

A stakeholder pension is a type of defined contribution pension and it’s relatively straightforward to start yourself. A stakeholder pension makes sense if your income is irregular. You can make payments from just £20 per month and there is no penalty fee if you change or stop your contributions. The other main advantage is that, because stakeholder pensions incorporate a minimum standard set by the government, the charges are low.

Stakeholder pensions will have a default investment strategy if you don’t want to choose where to invest your pension. The default option will include low to medium risk investments so returns may be lower. If you’d like to investment in higher risk funds with potential for higher returns then you will need to pick the funds yourself from those your provider offers.


A Self Invested Personal Pension (SIPP) offers more flexibility than a stakeholder pension. You can choose exactly where your money is invested and decide how much risk you’re willing to take. With a SIPP, you have the potential to generate higher returns than you would by saving the same amount of money in a stakeholder pension.

A SIPP offers more flexibility than a stakeholder pension, offering you a wider range of investments to choose from and more control over the investments you choose. However, SIPP providers can have complex charging structures and higher fees, so be sure to fully research any scheme and fees you could be paying on your pension.

Alternative savings

It’s a good idea to spread your money across a combination of a pension plan and Individual Savings Accounts (ISAs). Having some of your money in an easily accessible ISA is a wise decision if your income is unpredictable. There is a wide range of ISA products suitable for retirement, including:

  • the cash ISA – a simple, tax-free savings account allowing you to save up to £15,240 per year
  • the stocks and shares ISA – a tax-efficient way to invest up to £15,240 per year
  • the Lifetime ISA which will become available to those aged under 40 from April 2017 and entitles you to an annual government bonus of 25 percent on annual contributions up to £4,000
  • the Innovative Finance ISA (not yet launched) which will enable you to invest in peer-to-peer and crowdfunding schemes.

Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Pension rules apply and tax rules may change in future. If you need help with pensions, seek independent financial advice.


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Lisa Caplan

Lisa Caplan is head of financial advice at Nutmeg. She combines her wide experience of developing brands for blue chip companies with eight years as a chartered financial planner delivering financial advice to a range of people at different stages of their lives.

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