Self Employed Pensions: An Essential Guide for Freelancers and Sole Traders

A parliamentary publication on pensions reported that only 16% self employed workers are contributing to a self employed pension. And although the remaining 84% may have other plans in place to give them income when they stop work, it could also mean many sole traders are facing having insufficient income for their retirement.

This guide is designed to help freelancers and sole traders understand the importance of self employed pensions, how they work and the tax advantages available, so you can start planning your financial future today.

What is a Pension?

Put simply, a pension is an income that people receive when they stop working and earning money through their job, trade or business.

Pension income typically comes from:

• State Pension
• Private Pensions such as SIPPs, stakeholder pensions and workplace pensions.

Self Employed Pensions: A Necessity for Your Future

While you’re entitled to receive the state pension as a self-employed worker once you reach the age of 66 (increasing to 67 from 2026), relying solely on this may not be enough to cover your living costs. The current full state pension is £11,973 per year, which could leave you struggling to maintain your desired lifestyle. For this reason, contributing to a self employed pension is crucial for securing your financial future.

So if the government has reported that only 16% of sole traders contribute to a self employed pension, what is happening with the other 84%?

Some believe that self employed workers have other arrangements in place that will supplement the state pension, such as property investment. 

Others may be side hustlers who have workplace pensions that both themselves and their employers contribute to via their payslip. 

But other sole traders may not have any pension plans in place and could face living on less than £12,000 a year. For this reason, it’s important that self-employed workers without a pension plan in place prioritise saving for their future.

Private Pensions for Self-Employed

A private pension is a long term investment account that you pay money into instead of a traditional savings account. 

Generally, the money you pay in is invested on your behalf to grow it hopefully to beat inflation, unlike a traditional savings account where your money stays at the same value getting eroded by inflation and only receives bank interest.

To encourage UK individuals to save for retirement, HMRC offers tax relief on pension contributions both when you pay money into it and when you draw money out for retirement.

Understanding Tax Relief on Contributions

One of the biggest advantages of contributing to a self employed pension is the tax relief. For every £100 you contribute to your pension, the government adds £25 on top. This boosts your pension pot right away. For higher-rate taxpayers, the relief is even greater—up to 40%, meaning if you contribute £100, you could get an additional £40 added to your pension.

Example: If you’re a basic-rate taxpayer and contribute £500 to your pension, the government will add £125, making your total contribution £625. 

Higher rate and additional rate taxpayers will receive more, with higher rate taxpayers being able to claim a further 25% and additional rate taxpayers 31%. 

The maximum annual pension contribution allowance for this tax relief is £60,000**. 

**If your annual adjusted income is over £260,000 the pension allowance is reduced, on a sliding scale, down to £10,000 for adjusted incomes of £360,000 or more.

Withdrawing Money from a Private Pension

Once you reach the age of 55 (rising to 57 on 6 April 2028) you can access your pension and take up to 25% as a tax-free lump sum, up to £268,275 (the rest will be subject to income tax).

Alternatively, you can withdraw regular payments while leaving the rest invested or switch your pension into alternative investments such as annuities.

Types of Private Pensions for the Self-Employed

There are three main types of personal pensions available to self-employed individuals:

1. Ordinary Personal Pensions (Private Pensions)

These are the most common type of pension scheme. You make contributions, and the pension provider manages your investments. 

Pros: Easy to set up, reliable, and your pension provider manages your investments for you.

Cons: Your money is at risk, and the provider may charge management fees that reduce your overall returns

2. Self-Invested Personal Pensions (SIPP)

A SIPP allows you to manage your own investments, choosing from a wide range of funds.

Pros: More control over your investments, ideal for those who want to take an active role in managing their pension.

Cons: Higher fees, more complex to manage, and potential for higher risks if you’re not experienced with investing.

3. Stakeholder Pensions

These are flexible pension schemes popular with individuals with irregular incomes. Stakeholder pensions are a particularly popular self-employed pension because they allow you to contribute when you can afford to and take a break if your income fluctuates. They also come with capped charges, making them more affordable in the long run.

Pros: Flexible contributions, low charges, and suitable for those with fluctuating incomes.

Cons: Less control over investments compared to SIPPs

How Much Should You Pay Into Your Self Employed Pension?

The amount you need to be contributing to your pension depends on various factors including:

• Your current age
• The age you’re planning to retire
• Income needed to maintain your desired lifestyle in retirement
• The value of any other savings or investments you have
• How much you can afford to set aside during your working life

Tip: To give you an idea of how much money you need to contribute either contact a financial advisor or start by taking a look at the PensionBee pension calculator for a more tailored estimate.

Pension Carry Forward Rule: A Hidden Opportunity

As mentioned, you receive tax relief on pension contributions up to £60,000 every tax year. The pension carry forward rule lets you use unused allowance from the previous 3 tax years.

The previous tax years allowances were:

Pension allowance 2025/26	£60,000
Pension allowance 2024/25	£60,000
Pension allowance 2023/24	£60,000
Pension allowance 2022/23	£40,000

So if you haven’t taken advantage of this allowance previously, this could be a nice way to start your pension with a lump sum. Or, if you’re self-employed, you could make additional contributions when you have profitable years to make use of any unused allowance in previous years.

Secure Your Future with a Pension Plan

Self employed pensions can be a complicated topic with sole traders feeling so overwhelmed by the jargon and their complexities, they end up burying their heads in the sand. Whilst that is totally understandable, pensions are an essential part of your financial future, especially if you’re self-employed.

Remember, when you work for yourself, it’s up to you to make arrangements for your retirement. The government is looking for ways to encourage more sole traders to save for their future including increasing the rate of class 4 national insurance, so a percentage would go towards a pension. But until then, it’s up to you.

Consider talking to a financial adviser or opening up a Nest Pension. Nest is a workplace pension, used by employers for their employees but it also caters for the self employed. It is generally considered to be a low risk pension scheme, backed by the government and is a great way to get started saving for your retirement.