I’m self-employed – what’s the best way to save for retirement?

When you’re busy building a business, saving for retirement can understandably slip down your to-do list. But unlike employees – who are automatically put into a pension scheme – you’re in charge of sorting your own.

The sooner you get started, the better. I’ve answered the questions that might be holding you back.

Will I get the State Pension?

If you’re self-employed, then you’ll usually make National Insurance contributions. This might be on your tax return (if your profits are high enough), or by receiving credits when you claim support such as child benefit. Your State Pension will be based on your record and the number of ‘qualifying years’ you have of paying in. You can get a State Pension forecast to check your record and find out how much you might get.

Will that be enough?

Even the full State Pension is unlikely to give you the income you need in retirement. That’s where personal pensions come in.

You need to set up a personal pension yourself, and you’re responsible for how much you pay in and when. One myth is that you need a big lump sum to get started. This is not true! Whilst you can pay in ad hoc amounts – perhaps towards the end of your accounting year – you can pay in regular, monthly amounts too.

The government then tops up your contribution with pension tax relief. Pension tax relief is the official name for the government top up or bonus. The automatic top up is designed to add back in the basic rate of income tax (20%).

For every £80 you pay in, the government tops this up by £20, giving a total of £100 in your pot.

If you pay more than 20% tax on some of your earnings, perhaps because you are a higher rate (40%) taxpayer, you can reclaim extra tax relief directly from HMRC. This means the £100 total contribution could end up costing you just £60. Any extra tax relief will be returned to you or reduce your tax bill for the year – it isn’t automatically paid into your pension like the first 20%.

Contributions for tax relief are limited by your UK earnings each year - if you’re a sole trader, this limit will be your taxable profits. The pension annual allowance applies too. This is £60,000 a year for most people and covers the total payments made into all your pensions for a tax year.

Pension options

We’ve got two pension accounts at AJ Bell. Both help people save for retirement, they just come with different features and benefits.

The first is a Ready-made pension. This is a simple low-cost account where you can choose from one of four funds managed by our in-house experts. It can also help you track down old pensions from any previous jobs you had for free.

If you’d prefer a wider investment range, a Self-invested personal pension, or SIPP for short, lets you choose and manage your own mix of investments.

Lifetime ISAs are worth a look

It’s not just about pensions. A Lifetime ISA is also an option for retirement saving if you’re under 40 when you first take one out. Or you might find a combination of the two accounts works best for you.

You can pay in up to £4,000 each tax year, and the government will match 25% of this, meaning you could get an extra £1,000 a year. The £4,000 limit counts towards your £20,000 overall ISA allowance. Although you need to be under 40 to open your first Lifetime ISA, you can then continue paying in until you turn 50.

If you’re a basic rate taxpayer, the 25% government bonus is worth the same as the tax relief you’d get on your pension contributions. If you pay higher rates of income tax, then pensions offer a better deal on the way in, as you can reclaim extra tax relief back from HMRC directly.

You can access your Lifetime ISA money free of any tax or penalties at age 60. Before then, a 25% government penalty charge will be taken from any money you take out.

Example:

If you’re a higher-rate taxpayer, paying £200 a month into a pension could give you a pot of over £179,000 after 30 years – similar to what you’d get with a Lifetime ISA.

But you could also claim an extra 20% pension tax relief, or £600 a year, which you wouldn’t get with a Lifetime ISA.

Source: AJ Bell calculations, assumes annual growth of 5% before charges of 0.75%

A pension can be accessed slightly earlier (age 57 from April 2028), but only up to a quarter will be tax-free. The rest of the pot is taxed like income.

Investing what you pay in

Whatever option you choose, you’ll need to make sure your cash is invested.

Our Ready-made pension automatically does this for you. It invests your own payments, the tax-relief top up from the government, and any existing pensions you transfer into your chosen investment fund.

You’ll need to choose how to invest your cash with a SIPP or Lifetime ISA. You set up a regular investment, to automatically invest in the same funds or shares each month, and benefit from a lower dealing charge.