Tips for self-employed people on how to set up a pension

Millions of people may be dreadfully unprepared for retirement: three-quarters of independent contractors do not contribute to a pension

We outline the various pension choices and highlight the top suppliers.

Seventy-six percent of independent contractors do not currently contribute to a pension, and 38 percent do not have a pension at all.

In its annual retirement survey, investment platform Interactive Investor came to this concerning conclusion.

Although the government's auto-enrollment program has allowed the vast majority of workers to start saving for their pensions, freelancers and independent contractors are not included in this.

Most people still don't have enough money saved for retirement, and they might be surprised when they get old.

Myron Jobson, senior personal finance analyst at Interactive Investor, claims that a large number of independent contractors are "sleepwalking their way into retirement difficulties and potential poverty."

"Unfortunately, self-employed people frequently lose out because they are not immediately enrolled in a workplace pension when they begin working, unlike employees. But if you don't contribute to a pension, you might fall far short of your retirement objectives.

According to the platform, 90% of self-employed workers over the age of 55 are not on track for a moderately comfortable retirement, and 60% of self-employed people have less than £10,000 in pension wealth.

We examine the various choices available to independent contractors and draw attention to a few pension providers.

Do I receive a pension if I work for myself?

You ought to be eligible for the state pension, which is currently worth up to 230 point 25 per week (or 11,973 annually) for people receiving the full new state pension.

The entire amount will require 35 years' worth of National Insurance contributions (NICs). Your pension will be smaller if you end up making less than that but have at least ten years of NICs.

However, obtaining a comfortable retirement requires more than just the state pension. Whether it comes from a private pension, an old workplace pension, or other savings, you will need additional income.

You might have received a workplace pension from a prior position before you began working for yourself. Another possibility is that you are on a zero-hours contract as part of your self-employed work and are therefore eligible for a pension under the auto-enrollment rules.

In actuality, though, most independent contractors are unlikely to have access to an active workplace pension plan, in which you contribute a portion of your earnings and your employer contributes a certain amount.

When you work for yourself, neither your employer nor the human resources department will be setting up a pension plan for you. You must instead resolve the issue on your own by taking matters into your own hands. Selecting a retirement savings vehicle, as well as the investments and the amount you wish to contribute, are all part of that.

When combined with managing a business as an entrepreneur, "setting up a pension" frequently ends up at the bottom of the administrative to-do list. However, this can feel challenging and overwhelming.

"Without an employer's guidance, choosing a pension can be a daunting task and people generally don't know where to start," says Holly Mackay, founder of the consumer website Boring Money.

Why retirement savings are so important.

Even though it's not through a conventional pension, you might already be saving for the future. You might be putting money into an ISA or making a buy-to-let investment, for instance. Or perhaps your goal is to use equity release when you're older to access housing wealth.

Pensions, on the other hand, are specifically made for saving for retirement and have the added benefit of government funding. Everyone is eligible for pension tax relief, regardless of whether they are self-employed or employed.

A 20 percent top-up is given to basic-rate taxpayers, 40 percent to higher-rate taxpayers, and 45 percent to additional payers.

Assume you make £60,000. 5,000 was contributed to a private pension. You can receive 40 percent tax relief because you are a higher-rate taxpayer, so the 5,000 pension contribution only costs you £3,000.

The tax relief increases the value of pensions. However, they are more restrictive than, say, ISAs because you can't access the money until you're at least 55 years old (it will rise to 57 in 2028). However, this could also be viewed as a benefit because it guarantees that your pension funds are protected until you retire and that you won't have to take them out for other reasons.

Continuing to work into old age may seem like a good option if you don't have much saved for retirement. However, statistics reveal that many people over 60 are working part-time or as freelancers.

What if you get sick and can't work? What if you want to enjoy retirement, maybe take more vacations, and spend more time with loved ones? Perhaps you want to retire early.

To make sure you can take care of yourself as you age and to have a comfortable retirement, you'll need a sizeable nest egg.

What choices do I have?

You can choose from a number of different pension options. They consist of self-invested personal pensions (Sipps) and pre-made personal pensions.

Wealthify, Nutmeg, and Moneybox are a few of the so-called robo-advisers that offer personal pensions, as are some of the largest insurers in the UK, including Aviva and Scottish Widows. Based on your responses to a brief questionnaire, robo-advisers suggest a pre-made investment portfolio for you. As an illustration, consider whether you wish to invest ethically or have a low-risk portfolio.

Investment platforms such as AJ Bell, Interactive Investor, and Hargreaves Lansdown also provide Sipps, which allow you to do it yourself and use investment funds, shares, and bonds to create your own pension. Some also provide pre-made portfolios that can be tailored to your objectives.

You can get tax relief and make up to 60,000 contributions to a pension each tax year. If your "threshold income" is more than £200,000 and your "adjusted income" is more than £260,000, you will receive a smaller annual allowance of £60,000.

The pension you select will typically allow you to make regular monthly payments or pay in ad hoc lump sums. If your income fluctuates significantly throughout the year, the former can be helpful. The latter is a good "set it up and forget about it" strategy that lets you know you're consistently saving for your golden years.

A lifetime ISA is an additional option. You have to be between 18 and 39 to open one. You can make contributions of up to £4,000 per tax year until you turn 50 after you open the account. They can grow tax-free like other ISAs, but in contrast to other ISAs, the government offers a bonus to encourage saving.

Every tax year, you receive a generous 25 percent bonus that can reach £1,000, depending on your contribution. For instance, you will receive a 500 top-up if you deposit £2,000 into your lifetime ISA during a tax year.

At age 60 or older, the funds can be used for later life or to purchase a first home up to £450,000. Therefore, lifetime ISAs can be used to save for retirement even though many people only think of them when purchasing a home.

Essentially, this bonus is equivalent to basic-rate tax relief on pension contributions. Withdrawals from a lifetime ISA, or any other kind of ISA, are tax-free. In contrast, withdrawals from pensions are taxable.

For a freelancer paying basic-rate tax, this means that a lifetime ISA might be a better retirement savings option than a pension (provided you meet the age requirements).

The best option for you if you are a higher-rate or additional-rate taxpayer is probably a pension because you will receive 40 percent or even 45 percent tax relief on your contributions.

Top pension providers.

As per Boring Money's 2025 Pension Awards, the top pension providers are AJ Bell, Nutmeg, and PensionBee.

The highest rating in the awards, 4 out of 5, was awarded to all of them by Boring Money.

AJ Bell was praised for having "good investment ideas and content" and for being inexpensive.

Both its ease of use and the fact that it offered "a wide range of different investment approaches and a lot of portfolios on offer compared to its competitors" were praised.

According to Boring Money, PensionBee is "especially good for less confident investors who value simple language and a straightforward, digital approach" and is useful for combining pensions.

Additionally recognized as best-buy pension providers were Fidelity, Interactive Investor, Moneyfarm, Hargreaves Lansdown, and Vanguard.

Because of its affordable fees, Vanguard is frequently a preferred option for pension savers. For people with modest pension funds, the pricing is no longer as competitive, though, as a minimum monthly fee was introduced in February.

Compare pension providers by looking at fees and charges, investment range, and customer reviews. If you prefer to manage your administration on a smartphone, make sure the app is good and keeps the process easy to use.

How much do I have to pay?

Since there is no magic formula or correct answer, this is a challenging question. The first and most crucial step is to open a pension and contribute funds. It's a start, regardless of whether you make a one-time donation of £100 or set up a recurring contribution of £50 per month. The first obstacle is now behind you.

You can start figuring out how much you can contribute once you have a little more free time and the mental clarity to thoroughly consider your retirement savings plan.

Consider your desired retirement lifestyle, if you plan to continue paying rent or a mortgage after you retire, and your estimated lifespan (for instance, any health conditions that may shorten your anticipated lifespan).

To find out how much you will probably receive from the government when you reach state pension age, get a state pension forecast. Do you have any additional sources of income, such as buy-to-let, nest eggs like Premium Bonds or savings accounts, or unused pension funds?

Make an effort to develop a clear picture of your current assets and income as well as your potential retirement.

Following that, you can use a variety of online pension calculators to determine how much you should contribute to a pension. For better financial planning and future planning, you can also try the government's online midlife MOT.