Skip to content

How Prudent is it for Self-Employed Workers to Pay into a Pension Scheme?

The number of British workers who don’t have a pension scheme is extremely worrying. As part of the overall total, there is a group of over 3 million self-employed workers who haven’t put anything away for their golden years.

Is this something that they should start doing right away?

Why Are the Self-Employed Different?

A survey by the government-backed National Employment Savings Trust showed recently that under a quarter of all self-employed workers in the UK are saving into a pension scheme. 

There are a number of reasons for this. One is the varying amounts that their businesses earn each month. It is easier for someone who earns a fixed monthly wage to budget for contributions to their pension pot.

A self-employed worker may have regular concerns about cash flow too. For example, you may be relying upon an international debt collection agency to recover debts, or waiting for a big order to come through. 

It can seem far more prudent to focus on investing in the business and getting through to the end of the month than putting money away for something that is years from happening.

What Are the Main Options?

If you rely on the new flat-rate state pension then you will receive £8,767 per year when retired. This works out as £168.60 on a weekly basis. This is the full figure for people who have made national insurance contributions throughout their working life. With people now living longer and enjoying longer retirement periods, this seems like a low amount to live on. 

Many employees are auto-enrolled in the government pension scheme by their employers, but the self-employed need to work out on their own what to do. In many cases, they will wait for their companies to be successful and stable before sorting out their own financial future. 

A good general rule is to save a percentage of your income that is half of your age. Therefore, some who is 50 would be saving 25% of their income. Meanwhile, a 30 year old only needs to save 15%. Naturally, you should speak to an appropriately qualified financial advisor before making any big decisions in this respect. 

One of the most sensible options is to make use of a traditional pension scheme with one of the country’s many pension providers. Even a small amount of money put away here each month will make a difference over the years. For many people, the most difficult is in getting started and making the first deposits.

One of the strongest reasons for doing this is the tax relief that is on offer. Basic rate taxpayers get £25 added on to every £100 that contribute to their pension. Anyone who pays more tax can also claim back £25 more for every £100. However, the rules vary in Scotland.

Another option is a Self-Invested Personal Pension, also known as SIPP. This means that you control the investment and can put the money into the likes of stocks and shares.

The government-backed NEST pension scheme is a cheap and simple option that lets you start off with very low amounts if you prefer. You could also look at ISAs, which have the benefit of giving you access to your money at any time.

It makes sense to at least consider your options and see if there is something that is right for your future.