Self-employed? Everything you need to know about pensions

Pensions are one of the most useful vehicles for saving for retirement, but starting too late can be detrimental to your long-term wealth. Most employees in the UK are automatically enrolled into a workplace pension scheme. For the self-employed, however, the responsibility falls entirely on them, leading to a major financial risk: data shows that only about 16% of self-employed people are actively saving into a private pension.

Putting a plan together early, and understanding the unique benefits of a Self-Invested Personal Pension (SIPP), is crucial for improving quality of life in retirement.

Financial reality check: why every day counts

For younger people, it’s understandable to think a pension isn’t a priority yet. However, this is one of the biggest mistakes many make, driven by a failure to account for two critical financial realities.

The first, and most urgent, reality is the inadequacy and instability of the state pension. The full new state pension is only around £230.25 per week (or £11,973 per year) in the 2025/2026 tax year. For comparison, the Pension and Lifetime Savings Association suggests a single person needs an annual income of around £31,700 to achieve a basic ‘moderate’ lifestyle.

Self-employed workers already face the burden of proactively managing their National Insurance contributions, including making voluntary Class 2 NICs to secure the 35 qualifying years required. This administrative effort, combined with regulatory risk – such as the uncertain future of the triple lock (the guarantee that the state pension rises each year by the highest of inflation, wage growth or 2.5%) and the rising state pension age – highlights precisely why a personal pension is one of the only reliable plans for true financial security in retirement.

The second factor is the immense power of compounding. When it comes to saving for the future, time is the greatest asset. Compounding is the idea that the returns generated by investments begin to earn returns themselves, creating a powerful cycle of exponential growth. Delaying saving, therefore, means needing to contribute much larger amounts later in life to reach the same retirement income goal.

So – what are the options? 

Moving away from auto-enrolment means selecting the right type of personal pension becomes essential.

One option is the National Employment Savings Trust (NEST) route. This is an easy enrolment option, which may be a good starting point if you have limited time. However, this may not be the most cost-effective option: NEST charges a 0.3% annual management fee but also a 1.8% contribution fee on every payment made. Over a long period, this contribution fee can be particularly costly to your savings growth, and the investment options are very limited.

For greater long-term value and control, the most common and flexible choice is the SIPP. These products offer greater flexibility in both investment options and fee structures. While some SIPPs are entirely self-directed, other providers offer a managed approach. For instance, our Moneyfarm SIPP provides professionally managed portfolios within the flexible SIPP structure, and this tailored approach recently earned us the Boring Money Best Buy SIPP of 2025 award.

Regardless of the type of pension selected, an important first step is identifying any forgotten pension savings. Most self-employed individuals have old workplace pensions scattered across previous employers, incurring separate fees and sitting in unmanaged default funds. Why settle for zero control over that forgotten money? Consolidating savings into one place reduces redundant fees, creates a clearer view of overall finances and provides the control needed to actively manage the total investment strategy. This process doesn’t have to be handled alone. At Moneyfarm, a free Find, Check and Transfer service is available to help locate lost pensions and bring them together within a new SIPP. Standard Moneyfarm pension fees apply once pensions are consolidated.

How the SIPP can maximise savings and income

It is easy to say that a SIPP is crucial, but its real value lies in the way it secures long-term financial wellbeing through favourable tax legislation and flexible access rules.

The tax advantage and contribution rules

Each time a personal contribution is made into a SIPP, the government adds tax relief. For a basic rate taxpayer, every £80 contributed results in £100 being paid into the pension. Higher and additional rate taxpayers can claim further relief through Self-Assessment. This immediate top-up significantly increases the value of contributions and enhances the long-term impact of compounding.

The tax benefits are governed by an annual allowance of £60,000 a year or 100% of the relevant UK earnings, whichever is lower. This limit is inclusive of all contributions.

For the self-employed, understanding what counts as “relevant UK earnings” is vital. Many entrepreneurs who own a limited company pay themselves a minimal salary and take the rest of their income through dividends. Crucially, dividends do not count towards the personal contribution limit. This means limited company owners tend to focus on employer contributions, as these are not limited by personal salaries and are often the most tax-efficient method. Employer contributions are an allowable business expense (reducing Corporation Tax) and are exempt from Income Tax and National Insurance.

Those wishing to contribute more than the current £60,000 limit can use the Carry Forward rule. This allows any unused annual allowance from the previous three tax years to be applied, provided membership in a registered pension scheme was in place during that period. To take advantage of this rule, the current year’s £60,000 allowance must first be fully used, and total contributions remain capped by the income earned in the current tax year.

Any investment growth within a SIPP is completely free from Income Tax and Capital Gains Tax (CGT). This tax-free environment is vital protection against fiscal drag (the erosion of wealth caused by tax thresholds failing to keep pace with inflation), ensuring compounding can deliver its full long-term potential.

Flexible access: your retirement options

The final, crucial benefit of a SIPP is the control it offers over retirement savings. There are multiple options available when accessing SIPP funds in retirement. The more modern approach is a dramatic shift away from the old, rigid system that often forced retirees to simply buy a fixed annuity (a guaranteed income) regardless of their needs.

Under current rules, SIPP access is permitted from age 55 (rising to 57 from April 2028), and it offers a range of powerful options.

The most common method is to take the maximum 25% Tax-Free Lump Sum upfront. Once this amount is withdrawn, the remaining 75% of the pension pot is moved into Flexi-Access Drawdown, which could be highly suited to the self-employed. Drawdown allows to transition into retirement gradually by leaving the funds invested and taking an adjustable income as and when needed, perfectly matching a flexible working pattern.

Alternatively, a SIPP allows the use of the Uncrystallised Funds Pension Lump Sum (UFPLS) option. This is particularly useful for entrepreneurs who may need ad-hoc lump sums. With UFPLS, each lump sum is split between a 25% tax-free portion and a 75% taxable portion. Importantly, this option allows the tax-free allowance to be spread across multiple withdrawals; however, if the full 25% tax-free lump sum is taken upfront, the UFPLS option is no longer available.

With this full range of options, a SIPP enables complete control of income planning during retirement.

Designing a personalised SIPP strategy

Once the rules are understood, the next step is to build a suitable plan. This strategy must address personal financial goals as well as the inherent risks of investing.

Firstly, it’s important to establish a clear retirement goal. The question of how much to contribute depends heavily on age and the desired lifestyle. To begin pointing in the right direction, our online pension calculator is a great place to start. For a more detailed understanding, our Guidance+ cashflow modelling service provides a comprehensive view of an individual’s overall financial situation. A Qualified Wealth Manager can run scenario analysis to present multiple future projections and support effective retirement planning.

Secondly, it’s important to manage investment risk. While a SIPP is an incredibly effective vehicle for growth, the value of investments can fall as well as rise, and you may get back less than you invested. It is vital to select a strategy that genuinely reflects your attitude to risk and your time horizon. For many busy entrepreneurs, choosing a professionally managed portfolio, such as the Moneyfarm SIPP, is a significantly less time-consuming solution. This approach ensures a complex investment strategy is expertly maintained, saving valuable time that can be dedicated back to running a business.

The path to a secure retirement

For the self-employed entrepreneur, instead of seeing auto-enrolment’s absence as a disadvantage, view it as a powerful opportunity for self-direction. The evidence is clear: relying solely on the minimal state pension is an unacceptable risk. The SIPP offers a crucial solution, helping to bridge this funding gap through tax efficiency and the powerful effect of compounding.

To fully realise this potential, taking action today can help secure a more stable financial future. This can involve tracking down old pensions using services like our Find, Check, and Transfer service, or establishing a future contribution plan into a SIPP with the help of Moneyfarm’s tools, including our Guidance+ cashflow modelling.

If you are unsure which options or tools are right for you, you can book a call with one of our Investment Advisory team for expert guidance on your retirement strategy. Don’t let the power of compounding be missed by delay. By putting a plan in place, you ensure your successful self-employed career is ultimately rewarded with the comfortable, secure, and flexible retirement you deserve.

Capital at risk.  The information in this article is provided for general information and does not constitute personal advice or a recommendation to transfer your pension. Transferring pensions is not right for everyone — you may lose valuable benefits or guarantees, and your new plan may have different charges or investment options. You should consider taking regulated financial advice before making any decisions about transferring or consolidating pensions.

The Pension Find, Check and Transfer service is free to use; however, standard Moneyfarm pension account and investment management fees will apply once your pensions are transferred. Past performance is not a reliable indicator of future returns, and the value of investments can go down as well as up.

Moneyfarm is authorised and regulated by the Financial Conduct Authority.