With our research in 2023 suggesting 45% of freelancers aren’t saving for later life, it appears many people will be relying on the pension payments offered by the UK Government to support them at an older age. But do the self-employed receive state pensions and retirement benefits?
Do the self-employed qualify for a state pension?
In the UK a flat-rate pension was introduced in 2016, and it is entirely based on your National Insurance record. The amount you will receive may change over time, but from April 2023 the weekly payment is currently set at £203.85 per week if you qualify for the full amount.
The State Pension age is currently 66, but will rise to 67 for those born after April 1960, and could be increased to 68 in the future, with a review by Parliament in the next two years.
Requirements to receive a state pension are;
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You must have at least 10 ‘qualifying year’s’ working or claiming benefits that qualified for National Insurance contributions.
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To receive the full state pension amount, you’ll need to have 35 qualifying years.
You can check your current State Pension forecast online via the Gov.uk website. If you have gaps in your National Insurance contributions, it’s possible to make voluntary payments to increase your pension. Normally this is only available for the past six years, but you’re currently able to make up for missed contributions from 2006 until 2016 until April 5th, 2025.
Those eligible to make voluntary payments include the self-employed with income of £1,00 or less, or profits of less than £6,725. You can find more information on voluntary National Insurance here.
There are also different rules around eligibility and voluntary payments if you’ve lived or worked abroad for a period of time.
Assuming there are no changes between now and the date you become eligible for a state pension, without any other savings or retirement benefits, your maximum annual income will be £9,784.80, which probably won’t support a comfortable standard of living.
Why the self-employed are more reliant on the state pension
Automatic Enrolment in private pensions has been phased in for UK employees since 2012, with many also receiving additional contributions from their employer.
The self-employed are required to choose and invest in their own private or personal pension, and our latest research reveals 15% are yet to take this step, with a further 30% not currently paying into it due to other financial priorities.
Alongside the challenge of a fluctuating income, other barriers to pension savings include not being able to keep an existing provider when moving into self-employment, or taking on a new role.
It’s worth speaking to specialist financial advisors and pension providers, especially when IPSE members can receive exclusive offers from partners including Contractor Wealth.
The government does incentivise private pension contributions with a 25% tax bonus, and it’s possible to consolidate any older plans you may have. There are benefits and disadvantages involved, covered in this article on combining pensions.
What types of pensions are available for the self-employed?
One benefit of being self-employed is that you’re free to choose the type of pension you want to invest in for retirement. With any financial matter, it’s always worth getting specialist advice, but some of the options available include:
Personal/Private Pension: A type of defined contribution pension where the money you contribute is invested in a wide range of assets and funds by the provider.
Self-invested Personal Pension (SIPP): This is a specific type of personal pension that allows you more control and flexibility over both payments, and investment decisions.
Nest pension: Set up by the government to make workplace auto enrolment easier, you can sign up for a Nest pension if you’re self-employed. While it’s backed by the government as a public body, the funds are still supplied by workers and employers.
There are lots of things to consider when choosing the best pension option, including choice and flexibility, charges, and convenience. Along with the available tax relief, and the amounts you’ll need to contribute to achieve a comfortable income at your chosen retirement age.
Alternatives to pensions for the self-employed
One benefit of being self-employed is that you’re able to choose work you find fulfilling, and which fits your lifestyle. So, you may want to continue working indefinitely, supplementing your pension as needed.
But having a suitable pension or alternative savings gives you more freedom over later life. If you’re looking at alternatives to a pension or have already contributed the maximum amount to benefit from tax relief, then alternatives include an Individual Savings Account (ISA).
Four types of ISA are available (Cash, Stocks and Shares, Innovative Finance and Lifetime). For longer term investments, the Stocks and Shares or Lifetime ISAs would be typically recommended, but there are various benefits and limitations, with Lifetime ISAs unavailable to those over 40 years old.
Other alternatives include personal investments, and assets such as property. In all cases, it’s important that you understand the potential advantages and risks of any financial plan.
And if you’re currently struggling to find any funds to invest in later life, why not take a look at our Advice section dedicated to your financial Wellbeing, including how to save money, managing personal debt, and when it’s worth hiring an accountant. Along with increasing your income by growing your self-employed business and winning more client work.
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