Only 4% of fully self-employed individuals are currently saving into a private pension, according to figures from the Pensions Commission. The commission, a government-established inquiry, is investigating the state of retirement planning in the UK.
Self-employed people are not included in the auto-enrolment system, which mandates employers to offer staff access to a pension scheme. This also means they miss out on employer pension contributions that are available to those in occupational schemes.
Challenges for self-employed individuals include a potential lack of spare cash during business building and unpredictable earnings patterns, which can make regular pension contributions difficult. However, the pensions system offers flexibility, allowing for one-off contributions that can align with fluctuating income streams.
While employer contributions are not available, the government provides tax relief on savings, topping up contributions at the highest marginal rate of income tax. For example, a £1,000 contribution would cost a basic-rate taxpayer £800.
Self-invested personal pensions (SIPPs) are highlighted as a suitable option for many self-employed individuals, allowing for flexible contributions. Those operating as limited companies can also make employer contributions through their business, which can reduce corporation tax and avoid employer's national insurance.