What is the best pension if you’re self-employed?

For the self-employed, saving for retirement falls entirely on your shoulders. Despite this, only 20% of self-employed workers participate in a pension scheme — a stark contrast to the 78% of employees who do, according to a survey by Monzo.

With many self-employed workers making an irregular income, it can be tempting to prioritise your immediate needs over long-term financial security. Yet, even if you’ve made enough National Insurance contributions to qualify for the State Pension, you’ll only be eligible for £11,500 per year. This amount is unlikely to provide a comfortable lifestyle, especially if ill health forces you to retire earlier than planned.

The good news? Setting up a personal pension can be straightforward, especially with the right self-employed accounting software. Making small, regular contributions can make a major difference, too. To help you feel more prepared for the future, this guide walks you through everything you need to know about setting up a personal pension.

What is a self-employed pension, and why do you need one?

A self-employed pension is a personal pension plan that helps freelancers, solo entrepreneurs, and other self-employed workers save for their retirement.

Individual workers are responsible for setting it up and managing it themselves, and the amount they receive depends on how much they contribute and how their investments perform over time. 

Unlike full-time employees, self-employed workers aren’t automatically enrolled into a pension scheme, and don’t benefit from mandatory employer contributions. The sole responsibility for building a retirement nest egg depends on you, making proactive planning a crucial step, especially given the fluctuating nature of self-employed income. 

In contrast to a standard savings account, a self-employed pension is highly tax-efficient. Contributions immediately benefit from the government’s Basic Rate tax relief, which provides an effective 20% top-up on the amount you set aside. Funds within the pension are exempt from both Income Tax and Capital Gains Tax (CGT), allowing your capital to grow and compound over the long term.

Crucially, putting money aside early through a self-employed pension ensures you will have a private income beyond the State Pension after you reach retirement age, helping you secure financial independence in your later years, and giving you precious peace of mind throughout your working life.  

What self-employed pension plans are available?

Self-employed pensions come in many forms, each offering unique tax benefits, investment options, and access limits. Here are the conditions, benefits, and drawbacks of the four most common retirement plans for self-employed workers.

Standard personal pensions

A personal pension, or private pension, is the most common type of pension plan for self-employed workers.

Unlike workplace pension schemes, it’s a defined contribution scheme, which means you choose your own provider, set it up, and contribute to it yourself. You also have the flexibility to make regular payments or one-off lump sums, which is useful if your income fluctuates.

When you pay into personal pensions, the government tops up your contribution with basic tax relief (20%), and you can claim extra tax relief (40-45%) if you’re a higher rate taxpayer. With personal pensions, the provider also manages investments on your behalf. This simplifies the process but makes the option less suited to experienced investors who want control over their risk level. 

Stakeholder pensions

A stakeholder pension is a regulated type of personal pension that is designed to be flexible, simple, and low-cost.

Self-employed workers using the scheme are capped at paying a maximum of 1.5% for the first 10 years and 1% after that. It’s completely free to transfer out of a stakeholder pension, and minimum contribution pensions can’t exceed £20, making it an incredibly accessible and affordable option for self-employed workers. 

This type of pension also boasts all the tax benefits you’d find with regular pensions. However, the trade-off is that it offers less flexible investment options than SIPPs, making it best suited for new savers who prefer a hands-off approach to pension building. 

SIPPs (Self-Invested Personal Pensions)

A SIPP is a flexible type of personal pension that allows self-employed workers to choose investments that align with their individual goals.

Specifically, SIPPs let you invest in a wide range of assets, such as stocks, bonds, and commercial property, making them more suitable for experienced investors than standard personal pensions. You can also decide how much and when to contribute, and like traditional pensions, they also benefit from government contributions. 

However, SIPPs can charge high administrative fees for complex investments, making them more costly for less active investors or those with smaller pots. Also, while 25% of the pension pot is tax-free to withdraw in retirement, the remaining 75% is taxed as income at your marginal rate at the time of withdrawal.

Lifetime ISAs

A Lifetime ISA, or LISA, is a savings account designed for first-home buyers and those building a retirement nest.

Unlike pensions, contributions for ISAs are made from post-tax income, but withdrawals are entirely tax-free in retirement. The savings account also lets you withdraw funds early, as long as it’s for a first-home purchase.    

Lifetime ISAs have much stricter conditions than other personal pensions. To be eligible for a savings account, you must be between 18 and 39, and be able to contribute up to £4,000 annually until the age of 50.

Unless you’re cashing out money for a home, you also get charged a 25% penalty if you withdraw money before the age of 60, which can result in you getting back less than you put in.

How much should you pay into a pension if you’re self-employed?

As a self-employed worker, you’re solely responsible for funding your retirement, so deciding how much you’re going to pour into your pension is crucial.

There aren’t any hard-and-fast rules when it comes to calculating your contributions. However, as a general rule of thumb, we recommend aiming to save 15% of your pre-tax income.

Alternatively, you can take half of your age (as a percentage) when you start your pension, and contribute that percentage of your gross income for the rest of your working life. 

For example, if you are a self-employed freelance graphic designer and are starting a pension at 34, aim to put aside 18% of your income towards your pension. If you earn £50,000 a year, this would equate to £9,000 per year, or £750 per month. 

While you should aim to add to your pot consistently, your payments don’t need to be fixed. Unlike full-time employees, you have the option to pay more in months or years where your income is higher, and less when business is quieter. You can start small as well. Compound growth means that small, regular contributions add up significantly over time. 

Don’t forget about government tax reliefs, either. For a basic-rate taxpayer, every £80 you pay in is topped up to £100 by the government. If you are a higher-rate taxpayer, you’re able to claim even more relief back via your Self Assessment tax return. This makes saving for retirement much more cost-efficient than saving in a standard bank account.

How to set up a self-employed pension in the UK

Setting up a pension can feel overwhelming. Yet, with the right guidance, securing your future finances might be easier than you think. We’ve distilled the process into simple steps to help you hit the ground running. 

1. Compare providers

Before anything else, you’ll need to select a suitable provider for your pension plan. You have two main options to choose from: traditional insurers or digital pension apps.

• Traditional insurers: Established insurers like Legal & General and Aviva offer “set-and-forget” pensions for inventors who prefer a hands-off approach. Fund options tend to be slightly more limited, with investments being managed by the provider’s in-house experts.
• Digital pension apps: Modern platforms like Vanguard and PensionBee tend to give you more flexibility over your pension and a wider selection of investment types. This option is best suited for investors who want to actively manage their own portfolio. 

No matter which path you choose, prioritise providers that offer transparent pricing and low annual charges to avoid paying more than you need to.

2. Open an account and set up contributions

To sign up to your chosen provider, you’ll need your National Insurance number, bank details, and potentially a valid form of identification.

After you’ve successfully registered, you can set up a direct debit to start paying into your pension pot. The amount you choose to invest is completely up to you. You can schedule consistent, fixed payments or top up the account on an ad-hoc basis, depending on how business is going.

Before you select a payment plan, check your provider’s minimum initial contribution and ongoing payment limits. And remember, for every £80 you contribute, the government automatically adds £20 in basic-rate tax relief into your pension pot.

3. Choose your investment funds

Your money is invested in funds when you contribute to your pension. It’s up to you to decide whether to stick with the default or customise your options. 

Opting for default investments is the simplest choice; these funds are managed professionally to reduce risk, making them ideal for workers who prefer a hands-off approach and don’t have tonnes of time or investment knowledge. 

Alternatively, with options like SIPPs, you can choose from a much wider range of shares, index trackers, and managed portfolios. This option requires more time and expertise, but lets you fully tailor your investments to your risk tolerance. 

4. Keep records for HMRC and tax returns

Instead of relying on paper statements that could be lost or damaged, we recommend keeping digital records of all your contributions. While the pension provider automatically claims the basic 20% tax relief, if you are a higher or additional-rate taxpayer, it’s your responsibility to claim the remaining relief (20-25%) via your Self-Assessment tax returns. 

To ensure you follow HMRC protocols, you should keep records of all personal contributions made during the tax year, including the amount and date of payment. 

5. Utilise accounting software

To improve your financial visibility and simplify record-keeping, we also recommend using self-employed or HR payroll software like QuickBooks, Xero, or Wave. 

After you’ve chosen a platform, create a ‘Personal Pension Contributions’ category and log payments into this category, linking them to your bank transactions. 

Doing so will ensure that all contributions are neatly separated from your business expenses and are easily identifiable when completing your annual Self-Assessment tax return. This record-keeping system will also help you claim additional-rate tax relief if you are eligible. 

Tips to make saving for retirement easier when you’re self-employed

With no automatic enrolment to fall back on, saving isn’t easy, especially if your income is inconsistent. To save with less stress, here are some strategies you can use to grow your nest egg. 

• Automate contributions: Making small, regular transfers via bank transfer helps to remove decision fatigue and build consistently. Try to treat it like any other bill by paying it first every month. 
• Use busy periods for lump sums: Schedule larger, ad-hoc payments during high-income months. This strategy will relieve stress during quieter times, while helping you maximise your annual tax relief. 
• Prioritise your pension: Before mentally spending your extra earnings on luxuries or non-essential savings, set aside a chunk for your pension. Its immediate tax relief makes it one of the most efficient investments you can make. 
• Review and adjust: Regularly review your income and increase or decrease your contribution as your business and earnings change.

What if you don’t save into a pension?

Saving for a pension isn’t mandatory for self-employed workers, but failing to do so could come back to bite you later down the line. 

To be eligible for the full new State Pension, you must have made 35 years of National Insurance (NI) contributions. Consequently, self-employed workers who haven’t met this threshold may receive a reduced state pension or none at all if they’ve contributed for under ten years.

Even if you’ve made enough contributions to receive the full State Pension, its top limit for 2025/2026 is currently £11,973 per year, falling significantly short of the minimum standard of living required for a single person. Funding a moderate lifestyle will cost much more, making saving up for a pension earlier in life an essential step if you want to ensure a comfortable retirement. 

With personal pensions offering much more generous tax benefits compared to other saving methods, pouring into a pot from earlier in your life really is a no-brainer.

The good news is that small steps can accumulate to make a massive difference. Even putting as little as £25 aside each month allows you to benefit from tax relief and compounding growth, helping you lay down a strong foundation that you can build upon over time.