Pensions for the self-employed: what you need to know

Employees in the UK have their pension handled by their employers. However, things can get confusing when it comes to a self-employed pension (also known as a private or personal pension plan). For instance, those who are contractors, freelancers, or sole traders often need to manage their own financial plan for retirement. In this article, we answer some of the most common questions on private pensions.​

A pension is a financial arrangement that helps individuals save money for their retirement, providing a source of income when they are no longer working. ​

The UK government has implemented a program called autoenrolment with the goal of encouraging more people to save for their future. As the name suggests, autoenrolment requires employers to automatically enrol eligible workers into a workplace pension scheme. Both the employer and the employee contribute to the pension fund, which grows over time. ​

The government invests these contributions - typically in stocks, bonds, or other assets - to generate returns and increase your pension pot. Autoenrolment ensures individuals have a basic level of retirement savings, helping to build a culture of long-term financial planning. ​

Workers have the option to opt out if they wish, but staying enrolled can help to improve financial well-being in retirement.​​

A key benefit of managing a self-employed pension is that it compels you to take charge of your own retirement plans. By investing in a private pension plan now, you can lay a strong financial groundwork that will come in handy in the future. ​

Not only can this provide a disciplined and structured approach to saving, but it also offers tax advantages. ​

Contributions made to a pension receive tax relief, meaning the government tops up your pension pot based on your tax rate. This tax relief can be a valuable incentive to save more for retirement.​

Setting up a pension scheme for self-employed individuals is all about having the right information and thinking ahead. Here are the steps you can follow: ​

Remember, private pensions are a long-term commitment, so it's essential to regularly review and update your pension strategy so it keeps in line with any changing circumstances or retirement goals. If you choose to work with a financial advisor, they can help you through each of the steps above. Your accountant may be able to recommend a financial advisor to you.​

*As accountants, we're not the best people to ask for pension advice. It's a good idea to reach out to a financial advisor who specialises in that area. They'll have the expertise to guide you through all things pension-related and help you make the right choices.​

If you’re a UK employer with staff, it’s important to understand your pension responsibilities. You have a legal duty as an employer to enrol eligible employees into a workplace pension scheme and make contributions towards their pensions. This is known as automatic enrollment. ​

You must assess your employees' eligibility, which typically includes those who:​

Once assessed, you must provide your employees with information about the pension scheme, their right to opt-out, and the contributions you will make on their behalf. ​

You’re ultimately responsible for deducting contributions from their wages and ensuring they are paid into the pension scheme on time. It’s essential to stay compliant with pension regulations, regularly communicate with your employees about their pension rights, and fulfil your obligations as an employer to support your employees' retirement savings.​

If you contract self-employed workers, you’re not obligated to contribute to a pension. However, it's important to note that you may need to enrol them in a pension scheme if they are classified as employees and not genuinely self-employed. To determine the employment status of your workers, you can check out the HMRC employment status tool.​

If you’re an employee of your business receiving PAYE-paid wages, you’re sorted. Both you and your employer pay your contributions via the payroll system – the same as all other employees.​​

If you’re not an employee, or if you’re self-employed, contributions are personal expenses. Moving funds from the business bank account to your pension account should be recorded as drawings.​​

Make sure your contributions are included in your self-assessment tax return, or you may not get the tax relief you’d otherwise be eligible for.​

In the UK, there are specific rules and age thresholds governing when you can withdraw from your pension. The minimum age at which you can access your pension pot is currently 55 years old. At this age, you have several options for taking money from your pension.​

You can choose to take up to 25% of your pension pot as a tax-free lump sum. The remaining amount can be used to provide a regular income through an annuity or income drawdown.​

However, it's important to note that accessing your pension before the age of 55 is generally not allowed, except in specific cases such as ill health. It's advisable to seek professional financial advice to understand the various options available and make informed decisions about when and how to withdraw from your pension.​

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