A simple guide to self-employed pensions

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Securing your chances of having a stable income once retired is extremely important. Whether you're employed or self-employed you are accountable for your financial future in your old age.

Particularly as a self-employed individual, you are only entitled to a State Pension which is not a substantial income for a retiree. This is because self-employed workers are not part of a workplace pension scheme, as they work for themselves. On the contrary, employed workers get a state and a workplace pension.

In this simple guide you will find useful information on pensions for the self-employed.

What is a pension?

You can think of it as a tax-efficient savings account for your future self.

You are putting money to the side to use it as an income when you retire. There are several types of pensions and, depending on the type of pension, contributions to each pot can be made by several parties.

Once you're 55 or once you decide you want to retire after 55, you have access to this money and you can start withdrawing it as regular income.

Types of pensions

There are three types of pensions to begin with:

  • State Pension - this pension is paid by the government once you reach retirement age. You qualify for it only if you've made National Insurance contributions during your working life.
  • Workplace pension - this pension pot is arranged by your employer and each workplace has a separate pension pot. If you’ve had a few jobs throughout your working life, you could have  a pension from each employer subject to you qualifying for an auto-enrolled pension scheme.

It is also worth mentioning that there are two ways of paying into a workplace pension:

  1. Under the defined benefit scheme
  2. And under the defined contribution scheme, each with its own advantages and disadvantages.
  • personal pension - this pot is arranged by you and you or your family can contribute to it, whenever you want up to £40k tax-free. This is called an annual allowance which permits contributions up to £32k from you, with the Government rewarding you with £8k as tax-relief on top. 

As a self-employed worker, you can have more than one pension; for instance, you are eligible for a State Pension depending on whether you're qualified for it, and a personal pension if you contributed to one before retirement.

Pension or Savings account?

Saving money in a bank account and saving money in your pension pot sound similar, right? They are both a method of saving for the future but are also very different.

Saving for your future in an ISA has its perks such as unlimited and tax-free withdrawals, as well as no tax on the interest you earn. However, there is tax on payments made into this type of account and a limit of £20k per year that you can save - more than that and you get taxed.

But a pension has even more tax advantages than an ISA, as there is tax-relief on pension contributions. Specifically, self-employed workers - except for those in the personal allowance tax band - get tax relief on their pension contributions instantly. 

What are the benefits of a pension for the self-employed

A pension for any worker is a safety net for their future. The difference is that a self-employed person has to arrange their pension contributions themselves. This is because a workplace pension is not on the cards since they're not employed, and because the UK's State Pension is not enough for a retiree to rely upon as it is only £9,100 a year.

Did you know that the State Pension in the UK is one of the worst in Europe?

Also, a pension is extremely tax efficient. As a self-employed person, whatever money you put into your personal pension is topped up by the government as a form of tax relief. Also, there's more money going into your pot rather than going to the government because the tax you would have paid on your earnings can go straight into your pension. 

You are also able to withdraw a 25% lump sum of your pension tax-free at 55. 

Pension contributions for the self-employed

Your personal pension is... well, personal. It depends entirely - you are able to save as much as you want and as much as you can.

Other people can contribute to your personal pension pot too. Your family, children, spouse or your limited company - they all can.

There's also no limit on the amount of pension pots you can have. You can save in more than two pension pots such as two personal ones, or even a personal one and a workplace one, if you're both employed and self-employed.

How to find your lost pension

It is normal to lose track of our pensions over time. This happens when you’ve been employed by multiple companies in the past, as each workplace has a separate pension pot with a different pension provider.

Losing track of your pension can also happen when you change your address by moving house and you forget to update your pension provider, which from our experience people rarely remember to do. As you can understand, it is very easy and normal to lose track. And it is also easy to find them, all in one place.

You can use Raindrop's pension finding service; all you need to do is give us the name of your pension provider and we'll do the rest for you. We will locate your old pension pots and easily consolidate all of them into Raindrop's simple  online dashboard.

Take control of your pension today

Don't ignore your future until it's too late. Take control of your finances and invest in your pension.

Start planning for your retirement today.


Important information

Pensions are a long-term investment. The retirement benefits you receive from your pension plan will depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can go down as well as up. The value of your plan could fall below the amount(s) paid in.

The value of the tax benefits of your pension depend on your individual circumstances. Tax rules and circumstances may change in the future.

High levels of pension encashments or income may not be sustainable and in some cases could reduce the value of your pension to zero. You should consider the impact this might have on your income in retirement.

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If you are considering finding and combining your pensions into one place then Raindrop could be a good solution for you. If you choose to combine your pensions with Raindrop, as with all investments your capital is at risk. The value of your pension can go up as well as down.

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