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Pensions for the Self-Employed

By: Paul Geraghty - Updated: 20 Oct 2012 | comments*Discuss
Sipp Stakeholder Pension Self-employed

Pensions are one of those things most of us don’t like to think about. We have a rock star mentality and imagine “we’ll die before we get old” or suppose that it will all somehow be magically taken care of by the government. But the self-employed really can’t afford the luxury of not thinking about it. They’re out there on their own to a much greater extent than any other class of worker.

State Pensions for the Self-Employed

As a self-employed person you should be paying Class 2 National Insurance Contributions (NICs) and, unless your income is very low, Class 4 NICs. This entitles you to the basic state pension. But standard employees, who pay Class 1 NICs, are also entitled to an additional state pension. Unfortunately, those who pay only Class 2 and Class 4 NICs are not entitled to this additional pension. Remember in the basic employer\employee arrangement, the employer is forced to make contributions on behalf of the employee. This doesn’t happen when you’re self-employed so, however unfortunate, it makes sense that your entitlement should be lower. In many ways, then, the self-employed are greatly disadvantaged when it comes to pension arrangements.

The number of self-employed people in Britain has been growing significantly. Around 14% of the workforce now fits this description. With figures showing that over 60% of self-employed people are over 50 years of age, that levels of debt are higher in self-employed people than in other workers, and that self-employed people are less likely to have any savings than public sector workers, the pension arrangements of this significant sector of our workforce are potentially a great problem for our society as a whole. According to research, 53% of self-employed males and 67% of self-employed females have no private pension provision. For some of those currently earning a living as small-scale entrepreneurs, a penurious old age beckons.

Pension Options for the Self-Employed

So what are your options as a self-employed person once you’ve decided that the basic state pension won’t be enough for you? One is a Personal Pension. This is a fund into which you pay on a flexible discretionary basis (meaning you can make regular payments if you want, pay lump sums or not pay anything at all for as long as you like). When you retire, can take a portion of your accumulated find as a lump sum and must use the rest to purchase an annuity (guaranteed annual income) from a financial provider.

Stakeholder pensions are very similar to Personal Pensions but are more tightly regulated. The law imposes maximum administrative charge levels, for example, and mandates that you should be allowed to leave the fund without having to pay penalty fees.

A more exotic option is Self-Invested Personal Pensions (SIPPs). With these, you can exercise great control over where exactly your pension money will be invested. If you think there are great returns to be made in the biotechnology sector or in the Taiwanese fishing industry, for example, you are free to invest in those. Moreover, you can to switch and swap around investments as the whim strikes you. You can even invest in your own business. SIPPs are fairly complex, though, and, in some cases, you can end up paying very high management fees, so you’d be well advised to consult an expert adviser if you’re thinking of pursuing this option.

The government offers tax relief on all of these pension options, making it a very efficient savings vehicle if you’re happy not to have access to your savings until much later.


If you’re currently self-employed or are thinking of becoming self-employed, you’d do well to think about your retirement options now. You may enjoy the freedom and lifestyle that self-employment gives you, but it would be tragic if it culminated in an old age mired in poverty.

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