Self employed people make up 15% of the total workforce in the UK - that’s around 4.8 million people. However, only 31% of self-employed people pay into a pension. When we look at the participation rate for workplace pensions in the UK, we see quite the opposite. In 2023, 88% of eligible employees - or 20.8 million workers - contributed to a workplace pension, in part due to the introduction of Auto-Enrolment in 2012.
So what are the challenges faced by self-employed workers, what are their pension options and what should they think about when contributing and withdrawing?
The challenge for self-employed workers
Self-employment can bring flexibility, independence, and ownership. However, you might find that you lack much of the support that comes with paid employment. The reality is, if you work for yourself, you have to open a pension for yourself. This is something that all too often gets overlooked by the day-to-day demands of being a business owner.
When you work for yourself, you might find these three common challenges that work against you when you’re saving towards retirement:
An irregular income - fluctuating earnings can make consistent pension contributions challenging.
A lack of time - much of your efforts are going towards running the business, rather than building your wealth outside of work.
No employer support - unlike employees, you won’t benefit from employer contributions to boost your pension savings.
Saving for retirement as a self-employed person may seem overwhelming, but despite these challenges there are several options available to help you save towards your future as you build your business.
Self-employed pensions
There are two options for self-employed workers - a self-employed pension or a Self-Invested Personal Pension (SIPP). Both are defined contribution pensions that you need to open yourself, but a SIPP allows you to choose your own investments. Whereas with a self-employed pension - like the one with PensionBee - you choose a plan and the investments are made on your behalf.
All pensions (including PensionBee’s self-employed pension) are subject to an annual allowance which limits the amount you can contribute each year without paying tax. This is currently £60,000 (2025/26)). However, the annual allowance can be reduced for higher earners through a process called ‘tapering’ or for those who’ve started to access their pension. Personal contributions are also limited to 100% of your earnings (whichever is lower).
There’s no limit on the number of self-employed pensions you can have open at any one time. Although, if you have a few, you may prefer to consolidate them into one easy-to-manage plan and potentially save on fees. This may also make things easier for you in retirement as all your savings will be in one place.
If you haven’t used the full annual allowance mentioned above in previous years, you may be able to take advantage of any unused allowances from up to three prior tax years thanks to the carry forward rule.
The age of access for a personal or workplace pension is also earlier than the State Pension age, it’s currently 55, although it’s due to rise to 57 by 2028. So for many retirees, the reality is that they’ll first be able to access their personal or workplace pension savings from their mid 50s, and then their income will be supplemented by their State Pension (if they’re eligible) in their mid 60s.
When you make personal contributions to your self-employed pension, you get what’s called tax relief. This is where the government adds in extra money on top of your contributions. In England, most basic rate taxpayers usually get tax relief on their personal contributions, so for every £100 you contribute, the government adds an extra £25, making it £125. If you’re a higher or additional rate taxpayer, you can claim back even more of your pension contributions via a Self-Assessment tax return. The rules are slightly different for taxpayers in Scotland.
If your business is a limited company, you may be able to make employer contributions into your self-employed pension (alongside personal contributions), which can be treated as a business expense. So if you make employer contributions from your limited company to your pension of £30,000, you still have £30,000 left of your annual allowance to make in personal contributions. Just keep in mind that you can’t receive tax relief on personal contributions above what you earn. So if you only earn £20,000, the maximum amount your personal contributions can be is £20,000 gross. This works out at £16,000 net income and £4,000 tax relief.
One of the best things about paying into a self-employed pension? The contributions you make either from your limited company or in your personal name reduce the amounts of capital gains tax (CGT) or income tax you have to pay. This is a powerful tax incentive to start saving towards your retirement!
How often should you pay into your self-employed pension?
You can pay into a self-employed pension via lump sums or monthly deposits, much as you would a monthly subscription. With PensionBee’s self-employed pension, you can contribute flexibly and add as much or as little as you like as often as you like.
While there’s no set amount you ‘should’ pay into a self-employed pension, the general principle when investing - the money is invested remember - is that the earlier you start contributing the more you’ll be able to benefit from compound interest. This is where not only do your contributions grow over time, but the ‘growth’ you receive grows as well, creating a powerful snowball effect!
You also need a retirement savings goal to understand not only how much you could have in retirement, but if you’re on track to achieve it too. Handily, the Pensions and Lifetime Savings Association (PLSA) have developed their Retirement Living Standards which show retirement lifestyles at three different income levels. These can give you a good idea of what you might need in retirement whether you’re single or in a couple.
| Minimum lifestyle | Moderate lifestyle | Comfortable lifestyle | |
|---|---|---|---|
| Single | £14,400 per year | £31,300 per year | £43,100 per year |
| Couple | £22,400 per year | £43,100 per year | £59,000 per year |
To achieve the following, pension savers could be looking at the following *pension pot sizes to be able to achieve the above levels of income:
For example:
if you take £4,000 a year out of your £100,000 pension pot and you receive the full new State Pension (£11,973, 2025/26), you could achieve the PLSA’s minimum lifestyle with a yearly retirement income of just under £16,000. This would last you beyond your 100th birthday.
if you take around £19,500 a year out of your £200,000 pension pot and you receive the full new State Pension (£11,973, 2025/26), you could achieve the PLSA’s moderate lifestyle with a yearly income of just over £31,300. This would last you around 20 years.
if you take around £31,000 a year out of your £395,000 pension pot and you receive the full new State Pension (£11,973, 2025/26), you could achieve the PLSA’s comfortable lifestyle with a yearly retirement income of just under £43,000. This would last you around 20 years.
*These calculations assume your current and desired retirement age is 65 years old, you have a defined contribution pension pot and you don’t take 25% of your pot as tax-free cash. Source: PensionBee’s Pension Calculator.
How can you access the money in a self-employed pension?
When you come to access your pension pot, which you can currently do from age 55 (rising to 57 from 2028), you can take 25% of the money as a tax-free lump sum. You’ll then pay income tax on the rest. This is called pension drawdown. You can also buy an insurance product called an annuity, which pays you a fixed income for a term or for the rest of your life.
To work out the best options for you, and to see whether you’re on track to reach your projected retirement savings goal, you can:
use PensionBee’s Pension Calculator;
call the government-backed Pension Wise service from MoneyHelper (for those aged 50 and over with a defined contribution pension); or
seek regulated independent financial advice.
Getting the State Pension when you’re self-employed
Finally, let’s talk about the State Pension. All self-employed individuals are entitled to the State Pension, you just need to have a sufficient National Insurance (NI) record.
You need a minimum 10 qualifying years on your NI record to get any State Pension at all, and 35 qualifying years to receive the full new State Pension amount.
For the 2025/26 tax year, the full new State Pension is £11,973 or £230.25 a week in the 2025/26 tax year thanks to the ‘triple lock’.
The age of accessing the State Pension is currently 66 for both men and women, but it’s scheduled to increase to 67 between 2026 and 2028. To find out when you’re eligible to receive the State Pension, use PensionBee’s State Pension Age Calculator.
However, while the State Pension provides a foundation for retirement income, it’s unlikely to be sufficient for a comfortable retirement. The age of access will almost certainly be higher than it is today by the time many reading this reach their mid-sixties. That’s why self-employed individuals must build additional savings to maintain their desired lifestyle in later years.
Saving for retirement as a self-employed can seem daunting, and requires a lot of dedication and planning. But thanks to modern technology, the opening and management of a self-employed pension itself is something you can do from the palm of your hand. And the ability to make small contributions as and when means you can get started even with small sums, making it ideal for business owners. If you’re interested in opening a self-employed pension, then sign up to PensionBee and start saving towards your retirement today.
Rotimi Merriman-Johnson - also known as ‘Mr MoneyJar‘ - is an award-winning Content Creator, Qualified Financial Advisor and Founder of Mr MoneyJar Limited, a UK-based financial education company. He offers accessible, practical financial education, through digital content, events and one-to-one coaching. Rotimi covers topics such as personal finance, investing, getting on the property ladder and regularly comments on financial and political news events and has been featured on the BBC, The Financial Times, ITV News and Sky News.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
