How to plan for retirement if you are self-employed

Retirement planning for self-employed individuals can be a tricky process. Whereas traditional employees benefit from automatic enrolment into a workplace pension scheme, as a self-employed individual, it’s up to you to take full control of your pension.

If you are one of the 4.39 million self-employed individuals in the UK, here’s everything you need to consider when planning for your retirement.

How important is it to plan your retirement if you are self-employed?

Many individuals prefer self-employment as it offers unprecedented freedom and control over their career direction. But despite the many benefits, planning for retirement can be stressful – especially if you are nearing retirement age. Being self-employed, you might not have an employer pension. This means the onus is entirely on you to make sure you are regularly contributing to a pension pot.

This becomes problematic if you are nearing retirement age but haven’t been dedicated to your pension contributions.

Diversification can help to maximise opportunity for potential returns, while managing risk.

Why should I plan for retirement?

Retirement planning for self-employed individuals involves devising a long-term strategy for saving and investing so you can aim to be as comfortable as possible during retirement. It is a good idea for several reasons:

• Less stressful: By planning for retirement, you can alleviate stress by knowing you are taking proactive steps to secure your future.
• Pay less tax: By properly planning for your retirement, you can find tax-efficient ways to prepare for the future.
• Early retirement will be less stressful: If you are forced to retire early (or want to!), financial planning will help prepare you for this life change.

When should I plan for retirement?

There is no hard-and-fast rule dictating when you should start planning for retirement. The consensus is generally that you should start saving for retirement as early as possible. Even if you are not sure what you want to do when you retire or how much money you will need to sustain your lifestyle, paying into a pension will give you peace of mind when the time comes to retire.

How much money do you need to retire?

The first step when it comes to retirement planning is deciding how much money you need. While your spending patterns will change when you retire, you can figure out how much money you need by making a budget. To do this you could consider:

Essential expenditure: This covers all your necessities like costs associated with your home, utility bills, groceries and essential travel.

Discretionary spending: This is money set aside for your wants rather than needs. In this category are eating out, holidays and leisure.

Once you have figured out how much money you will need to maintain your lifestyle, think about when you want to retire. You can then calculate how much you need to invest each month to achieve this.

What can you expect to receive when you retire?

State pension

Even if you are self-employed, you can still access a state pension as long as you have been paying National Insurance for at least 10 years. Once you reach 66 years old, you can access your pension. You do not need to retire when you reach 66 to access your state pension – you can continue working until you choose to retire and draw down your state pension.

There are nuances to the state pension which dictate how much you can get. But if you get the full state pension, you will get a total of £230.25 in the 2025/26 tax year.

While this is helpful and can provide peace of mind, most people struggle to sustain their current lifestyle on this amount of money.

Employer pension

Even if you are self-employed now, you might still have an employer pension if you have ever worked for an employer. Most companies will auto-enrol you into a pension scheme and a portion of your salary will be set aside for your pension – often via a salary sacrifice scheme. Your employer will also pay at least 3% of your earnings into your pension pot. This means that you might be surprised how much money is in your employer pension, if you have one.

How to build your own retirement fund

Planning for retirement when you are self-employed requires building your own retirement fund to supplement your state pension. There are lots of different ways you can do this.

Personal pensions

A personal pension plan is one that you arrange yourself and regularly contribute to. You can contribute a proportion of your salary each month or add lump sums. Your pension provider will invest the money to benefit from compound interest.

With a personal pension, your money will potentially grow (tax-free) until you start withdrawing it.

Self-invested personal pensions (SIPPs)

This is a more flexible pension. The difference between a personal pension is that, with a SIPP, you manage your own investments. This is ideal if you like to have more control over where your savings are invested.

SIPPs can also bring tax benefits as you can claim tax relief on contributions. This makes them a valuable tool for self-employment retirement savings.

Stakeholder pensions

A stakeholder pension is a flexible, low-cost pension. They were designed to be more affordable compared to other pension pots as you do not need to contribute regularly, making them an option if you are self-employed with irregular or low income.

How to maximise tax relief on pensions

One of the main advantages of pensions in the UK is the tax relief offered on contributions. This makes pensions a tax-efficient way to save for retirement, especially for self-employed individuals planning for retirement.

If you are in a relief at source arrangement, the pension provider claims 20p tax relief back from HMRC for every 80p of your contribution received. This is no matter what the level of your earnings, however, it’s also subject to the basic rules as to who can get tax relief. Further information can be found here.

If you pay a higher or additional rate of tax, you can claim additional relief through your tax return.

The best way to maximise tax relief is to seek professional retirement advice.

How to diversify your self-employed retirement savings

One way to plan for retirement is by diversifying your retirement savings. This can help to manage risk and provide more income streams in retirement. Some ways you can diversify include:

• Individual Savings Accounts (ISAs):ISAs are a tax-efficient way to save or invest as the income and gains are tax-free.
• Property investments: Many self-employed individuals invest in property as part of their retirement strategy. Property can provide rental income during retirement to supplement other savings pots, pensions and your state pension.
• Stocks and shares: Stocks and shares usually offer higher returns compared to traditional savings accounts, thanks to compound interest. Although they are higher-risk, a diverse portfolio can help you manage your risk exposure.

How to manage irregular income when planning for retirement

If you are self-employed and have irregular income, planning for retirement can be harder. But it does not mean that you should put it off. If you have irregular income, you should consider:

Flexible contributions

Most pension providers allow you to make flexible contributions. This means you can contribute more during good months and less during leaner periods.

Lump-sum contributions

If your income fluctuates significantly, one option is to make lump-sum contributions when you have better cash flow. This means that you can save for retirement even if contributing regularly is challenging.

Automate savings

Even if you have irregular income, it can be useful to regularly contribute to your pension pot. You can do this by setting up a direct debit or standing order to save for retirement regardless of earnings.

Automating the process helps build the habit of saving and ensures you don’t forget to contribute.

If you are self employed and have irregular income, planning for retirement can be harder – but it does not mean that you should put it off.

Planning for retirement withdrawal

When it comes time for retirement, the way you draw down your self-employed retirement savings is as important as how you save. You can usually access your pension savings from the age of 55 with up to 25% available as a tax-free lump sum. However, if you withdraw 25% of your pension savings, you’re immediately reducing the value of your pension pot while also taking away the chance for that money to potentially grow through returns on investments.

The remainder can be drawn as income with the remaining funds still invested.

You can get free and impartial information from MoneyHelper, while they also provide a service for over 50s called Pension Wise. You can also contact your pension provider if you’re not sure when you can take your pension.

Seek professional retirement advice

Planning for retirement when you are self-employed requires more planning and discipline than for salaried employees. This being said, with some careful thought you can build a robust retirement fund. If you are wondering where to start with self-employed retirement planning, we can help.

Our team of financial advisors can help you take control of your retirement planning to help you move towards a secure financial future. Get in touch today to arrange a call with one of our experts.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.

Tax is subject to an individual’s personal circumstances and tax rules can change at any time.

ISA eligibility and tax rules apply. You should ensure your contribution does not result in your total ISA contribution within the tax year exceeding £20,000.

Pension eligibility and tax rules apply. You should ensure your contribution does not result in your total Pension contribution within the tax year exceeding £60,000 or 100% of your earnings, whichever is lower.

True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.

True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.

True Potential LLP is registered in England and Wales as a Limited Liability Partnership No. OC380771.