If you are a self-employed artist or arts worker in the UK, working out how to start saving for a time in the future when you cannot (or no longer wish to) work full-time (aka “retirement”) can feel a little stressful and daunting!
As part of the Being Really Good At Being Self Employed series, here’s some information you might find useful when thinking about setting up a self-employed pension.
Important Disclaimer – This information about pensions isn’t personal financial advice. If you’re not sure whether an investment is right for you please seek advice from an Independent Financial Adviser (IFA). If you choose to make investments (like a pension) the value of your investment will rise and fall depending on movements in global stock-markets, so you could get back less than you put in.
Do I need to pay into a pension if I am Self-Employed?
The short answer is YES. The longer answer is more complicated!
If 100% of your income comes from self-employment, you’ll need to make some kind of realistic plan so that you can provide for yourself in older age (when you may be unable to work or earn income due to ill health, incapacity, disability etc). The most conventional and established way of doing this is by saving money in a pension.
If you are Self-Employed, you don’t have an automatic workplace pension, and are not legally required to have one. This means you would need to set one up yourself, which is called a Personal Pension. There are three types of personal pension:
- Ordinary Personal Pensions – which are offered by most large financial providers
- Stakeholder Pensions – with limited/capped charges, low minimum contributions, and flexible payment options
- Self-Invested Personal Pensions (SIPP) – where you can make more choices about where / how your money is invested (but also need to learn more about how investing works!)
Conventionally, these types of Personal Pensions are invested in a mix of global stock exchanges and bond markets, loans, property and other financial products. Different providers will take different approaches to how they make investments, and in turn, where your money is invested.
There are options for your pension to be invested in companies that take Environmental, Social and Governance (ESG) criteria into account, options to invest in ways that adhere to Islamic ethical principles (Sharia-compliant), and other forms of ethical and socially responsible investing (SRI).
The aim of pension funds that are invested in global stock exchanges and bond markets is to out-pace inflation and interest rates offered by banks in the long-term (so that the money invested has more buying-power when you want to access it in the future). However, the value of your investment will rise and fall at different times, so there is always a chance that you may get back less than you put in.
If you are Self-Employed, you’ll need to research and learn about the variety of Personal Pension providers and choose one (or more) to set up a pension account with.
What about the UK State Pension?
Since the introduction of the auto-enrolment scheme for Workplace Pensions was introduced in 2008, this process is now the ‘norm’ (and you have to actively opt-out of you don’t want to be part of a workplace pension scheme).
I would argue that this creates the possibility that governments in the future could suggest that they no longer need to provide a State Pension. As someone who is a BIG FAN of the Welfare State (eg NHS, free education & childcare, benefits for people who are out-of-work and/or can’t work, housing & pensions), I dearly hope this doesn’t happen – but it could, and we all need to be aware of this.
Alternatively, or alongside this, future governments could (at any time) lower the rate of any State Pension paid out, or raise the age at which it can be accessed (currently 66, rising to 68 by 2046).
These trends respond to the ever-growing cost of paying out a State Pension to all qualifying citizens over the age of 66, an ageing population in the UK, and a public appetite for lower taxes.
There is also currently (May 2024) a large banner on the UK Gov sponsored Money Helper website that states “Don’t rely only on the State Pension” which may indicate future problems ahead!
Because Self-Employed people don’t have an automatic workplace pension, they may be at a greater risk of not having enough money to cover their costs if there are significant changes to the way the UK State Pension works in future.
NOTE TO SELF: Alongside thinking about setting up a Personal Pension for yourself, make choices that support the UK State Pension to continue. These include voting for political parties that make long-term commitments to maintain and re-grow the Welfare State; changing your attitude towards taxation and being willing to pay more tax; speaking to others about the importance of state provision of benefit for those unable to work (to help change attitudes more widely); getting involved in activism that supports Universal Basic Income etc.
How much money do I need to put into my pension?
If you are Self-Employed, you don’t (legally) have to make any pension contributions, and there is no widely recommended or ‘standard’ amount to pay in.
This means that you need to decide how much money to add to your Personal Pension and how often. To match the benefits someone with a Workplace Pension would have, you would need to invest a minimum of 8% of your self-employed income per year. You will also gain tax relief from the government (currently +£25 for every £100 you contribute), paid directly into your personal pension account.
The amount you choose to contribute may also be affected by what age you are when you start making contributions, and at what age you might want to stop paying in and start drawing down income from your pension fund.
EXAMPLE: If you are 43 now, and don’t have any pension savings or investments, and would like to stop working full-time by the time you are 68, you have 25 years in which to save and invest to make this possible.
You need to think really carefully about making contributions to a pension. It may feel financially difficult to make these payments when you are self-employed and money is tight, and you can’t withdraw the money from a personal pension until you reach a minimum age (in 2024 this is age 55, rising to 57 in 2028).
Although it may feel particularly difficult to make regular payments when you are younger, be aware that the later you start making contributions to a personal pension (or other types of investment), the higher % of your income you’ll need to add every month or year to get the same result.
What if I want to access money I’m investing before I’m 57?
There are also tax-free options to make similar types of long-term investments via Stocks & Shares ISAs (where you have full flexibility to access your money at any time, and don’t need to wait for retirement).
These don’t attract the 20% government tax relief bonus, so it would take you longer / cost you more to accumulate the same amount of money over time. There is also the risk that you might be tempted to ‘raid’ these savings at some point, as they are not ‘locked away’ in the same way they would be in a pension account.
This video gives a useful comparison between paying into an ISA instead of using a pension account.
I don’t earn that much from Self-Employed work, should I still bother?
If you are in a mix of PAYE and Self-Employed work, see if you can pay extra into your existing workplace pension (especially if your employer will continue to match these extra contributions) to cover the % of your income that you earn through self-employed work.
Some workplace pension providers will allow you to make one-off or regular payments on top of any contributions that come out of your salary automatically.
If 100% of your income comes from self-employment but that income is really low, you’ll still need to make some kind of realistic plan for a time in the future when you are unable to (or would like to stop) work.
It will be particularly important to you that you (and others on a national scale) make choices that support the UK State Pension to continue (see NOTE TO SELF above), and that you have made enough National Insurance contributions to qualify for a full State Pension (see HMRC’s info about making Voluntary National Insurance contributions).
I want to completely avoid Stocks & Shares – can I still save for a pension?
If you want a zero-risk long-term cash-only savings account that this not linked to Stocks & Shares, you might want to investigate Lifetime ISAs (LISAs).
LISAs can be opened by anyone in the UK aged 18 to 39. These offer a 25% government bonus on savings (in a similar way to government tax relief payments on pension contributions in Personal Pensions), and a small % of bank interest (depending on the LISA provider’s rates).
You can pay in a maximum of £4,000 per tax year plus receive the government bonus (currently +£25 for every £100 you contribute).
Any cash saved in a LISA should only be used for retirement (from age 60) or buying a first home. If you want to withdraw money from a LISA outside of these circumstances, you will have to pay a significant penalty that means you will get back less than you put in.
NOTE: Be aware that any money saved in a LISA are treated as ‘savings’, which means that any means-tested benefits you are entitled to (now or in future) could be affected. This is not the case with money you hold in a personal pension account.
Be aware that the money saved in your LISA account may not grow in line with inflation because its growth is limited to the rate of interest you can achieve from the LISA provider or bank. This means that over the long-term, the money you save may buy significantly less than it would today.
How can I learn more about how Self-Employed pensions work?
It can feel really full-on having to learn all about how pensions work from scratch! Here are some useful resources to get you started:
- Nest pensions – If you’re self-employed and don’t employ anyone else, you can create a self-employed Nest member account to start paying into a pension. The National Employment Saving Trust (NEST) scheme is run on a not-for-profit basis and is a public corporation of the Department for Work and Pensions.
- Pensions for self-employed people – useful information from UK govt sponsored Money Helper website, specifically tailored to answer questions for self-employed people.
- Pension need-to-knows – useful (but potentially overwhelming amount of) information from the Money Saving Expert website.
- Lifetime ISAs – overview of how LISAs work from UK govt sponsored Money Helper website
- Self-invested personal pensions (SIPPs) – overview about SIPPs from UK govt sponsored Money Helper website
Important Disclaimer – This information about pensions isn’t personal financial advice. If you’re not sure whether an investment is right for you please seek advice from an Independent Financial Adviser (IFA). If you choose to make investments (like a pension) the value of your investment will rise and fall depending on movements in global stock-markets, so you could get back less than you put in.
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