How Does a Pension Work if You Are Self-Employed in the UK?

self employed UK worker reviewing pension options
If you are self-employed, saving for retirement works a little differently compared to employees. Unlike those on company payrolls, you are not automatically enrolled into a workplace pension scheme. This means it is up to you to set up and manage your own pension, whether through a Self-Invested Personal Pension (SIPP), a Nest pension, or another private pension arrangement.
The good news is that you can still benefit from the same tax relief as employed workers, every contribution you make is boosted by the government. However, with fewer than 20% of self-employed people saving into a pension compared with 78% of employees, there is growing concern about a looming “pension gap.”

Why the Self-Employed Pension Gap Matters

The Social Market Foundation (SMF) has warned that unless more action is taken, millions of entrepreneurs could face “pension poverty” in retirement. Unlike employees, there is no auto-enrolment safety net for freelancers, sole traders, and contractors.
Government figures highlight the urgency of this issue, with a landmark pensions commission revived to review retirement savings. Without change, many self-employed workers risk relying solely on the basic State Pension, which may not provide the standard of living they expect.
pension savings gap UK self employed

What Pension Options Are Available to the Self-Employed?

State Pension

Yes, the self-employed can receive the State Pension, provided they make sufficient National Insurance contributions over their working life. The full State Pension is currently based on at least 35 years of qualifying contributions.

Private Pensions (SIPPs, Nest, Stakeholder Pensions)

Self-employed workers can set up their own pension plans. Popular options include:

• SIPPs (Self-Invested Personal Pensions): Flexible, with wide investment choice.
• Nest pensions: Government-backed, simple to set up, good for smaller contributions.
• Stakeholder pensions: Capped charges and low minimum contributions.

These plans can adapt to irregular income patterns, making them well-suited for freelancers and contractors.

Tax Relief Benefits

One of the biggest advantages of saving into a pension is tax relief. For every £80 you pay in, the government adds £20, and higher earners can claim back even more via self-assessment. This is a significant boost for long-term savings.
• Reference: ACCA Global – Is a self-employed pension crisis looming?
Online consultation with a financial planner helping self-employed with pension planning UK

Barriers Stopping Self-Employed from Saving

Irregular Income and Affordability

According to the SMF, around 30% of self-employed workers contribute less than once a month, while 10% contribute less than once a year. The unpredictability of income often leads people to delay or skip saving altogether.

Knowledge and Access to Advice

Two-thirds of self-employed people admit they don’t fully understand how pensions work. Generic advice can feel irrelevant, and financial guidance is often seen as something only for higher earners.
• Supporting source: Bytestart – report on boosting pensions.

How Much Should You Put Into a Pension?

Financial planners often suggest aiming to save around 12–15% of your income into a pension. Another common benchmark is the 70% rule, trying to build a retirement pot that will replace 70% of your working income.
The “3-year rule” is also relevant: you can usually carry forward unused pension allowances from the last three years, which is useful if you’ve had fluctuating income and want to top up when earnings allow.

Practical Steps to Start Saving Today

• Choose your pension type (Nest, SIPP, stakeholder).
• Automate contributions (e.g., set monthly direct debits, even small amounts).
• Use a pension calculator to estimate how much you should be saving.
• Review tax relief – make sure you’re claiming all available benefits.

For context, AJ Bell highlights the importance of assessing whether you are saving enough to retire comfortably.

FAQs about Self-Employed Pensions

How does a pension work if you are self-employed?

You must set up your own pension, such as a SIPP or Nest, and make contributions directly. The government adds tax relief.

How much should a self-employed person put into a pension?

Around 12–15% of income is a good guide, but it depends on your retirement goals.

What is the 70% rule for pension?

Aim for a retirement income of about 70% of your working income.

What is the pension 3-year rule?

You can carry forward unused allowances from the past three years, if eligible.

Do self-employed get the State Pension?

Yes, if you have enough National Insurance contributions.

Get Personal Guidance on Pension Planning

If you’re self-employed and want clarity on the best pension options, contact our financial planners at Zomi Wealth Management. Our advisers can help you understand your choices and build a retirement plan that suits your income, lifestyle, and goals.

References & Resources

Gov.uk – Government revives landmark pensions commission
Social Market Foundation Report – Self-Employed Pension Crisis: The Need for Action
This is Money – HMRC banks on nudges
Bytestart – New report to boost pensions
Pensions Age – Govt should allow HMRC nudges
AJ Bell – Government highlights chronic pension crisis
ACCA Global – Is a self-employed pension crisis looming?
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