Pensions for self-employed people – Part 2: How to set up a pension when you're self-employed
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Posted: Wed 30th Mar 2022
In part 1 of this guide, we explained why saving into a pension is important for anyone who's self-employed. You might find it difficult to support yourself when you retire if you don’t set up your own personal pension. Your pension is your financial security for when you finally stop working.
So how do you go about getting a pension? What type do you go for? What steps must you take to set it up?
In part 2 of our six-part guide, we take you through the different pension options available to you, how to choose between them, and what costs you can expect to pay.
Listen to PensionBee's Pension Confident Podcast: Keeping your self-employed pension on track
What are the different types of pension?
There are three main types of pension in the UK:
The State Pension, a regular payment you can claim from the government once you reach State Pension age
A personal pension (also called a private pension), which you set up with a pension provider yourself
A workplace pension, which your employer pays into when you work for them
For people who are self-employed, the State Pension and personal pension are most relevant. We cover the State Pension in more detail in part 1 of this guide.
With personal pensions, you have several options, which we explain below.
What are my options when setting up a self-employed pension?
When you're self-employed, you can start either a:
personal pension
self-invested personal pension (SIPP)
stakeholder pension
You also have the option of setting up a pension with the government scheme, National Employment Savings Trust (Nest). There are pros and cons to doing this, which we examine in part 1 of this guide.
It's worth keeping in mind that there is no one-size-fits-all pension for self-employed people. What's most suitable for you will depend on your circumstances. However, using a provider such as PensionBee is a useful option, as it lets you make contributions flexibly, as and when you want.
Watch our video: How do you set up a pension?
How do I set up a personal pension?
A personal pension (also known as a private pension) is one you set up yourself with a pension provider. PensionBee is one such provider but there are lots of others.
Once you've identified a suitable pension provider, you should be able to set everything up online, at the provider's website. Providers, like PensionBee, also have apps that make setting up a pension quick and easy.
All you'll need to do is provide some basic details – such as your date of birth and National Insurance number – and then you're up and running.
Paying into your personal pension
It's up to you how much you pay in and how often. However, it's worth bearing in mind that not all pensions are the same, and some providers may charge different fees (such as an inactivity fee, for example).
You can set up regular contributions (every month, for example) or make one-off lump sum payments. Remember: the only money going into your personal pension is the contributions you make yourself. It isn't like a workplace pension, where your employer makes contributions alongside your own.
Your pension provider will usually claim basic-rate tax relief on your contributions and add it to your pension pot. In effect, this means the government will add 25% to your pension contributions. So, for every £100 you contribute yourself, £125 will go into your pension.
If you're a higher-rate taxpayer, you can claim even more.
Managing your private pension
When you pay money into your private pension, the provider manages it, investing it in a range of pension funds that trade assets such as shares, bonds, property and cash. At the time you set up your pension, you’ll have the option of choosing which pension funds you want your money invested in.
There's typically a wide choice of pension plans – which one you go for will depend on your attitude to risk. While most people opt for the provider's default balanced-risk fund, you can choose to be more cautious or more adventurous. You can also choose to invest in line with your values by opting for a socially responsible plan.
Most new private pensions are defined contribution pensions. This means the amount you receive when you retire depends on how much you've paid in over time and how well your investments have performed.
If you have old or existing pensions – workplace or personal – you may also want to make your pension management easier by combining them into your new personal pension.
How do I set up a self-invested personal pension (SIPP)?
A self-invested personal pension (SIPP) lets you make the decisions as to how your savings are invested. Like other personal pensions, it's a defined contribution pension, meaning its value when you retire depends on the amount you've paid in and how your investments have performed over time.
You can compare SIPP providers online and then set up your chosen option at the provider's website. Again, many providers will have apps that let you do this quickly and simply.
Paying into your SIPP
Before you can make contributions into your SIPP, you'll need to decide:
what you want to invest in
how often you invest – will you make one-off contributions or pay in regularly?
Once your SIPP is up and running, it's essentially like any other pension – its value will rise and fall based on how the investments perform, and the provider usually claims tax relief on your behalf.
You can usually choose to pay quite a low monthly amount into your SIPP. However, it's often the case that making a higher contribution every month gives you access to further investment options, including shares, cash, investment trusts, government securities/bonds and more.
Choosing what to invest in
The type of investments you choose will depend on a range of factors, including your:
financial goals
current circumstances
attitude towards risk
knowledge of the market
investment experience
If you're unsure about much of this, or have little experience in investing money, a SIPP may not be your best choice, so it might be worth considering other options. Alternatively, you could pay a money manager to make these decisions for you (see Managing your SIPP below).
One major benefit of a SIPP is that it gives you access to a wide range of investments. These might include:
shares
cash
commercial property
You probably won't be able to invest in:
commodities
directly-owned residential property
buy-to-let property
loans
luxury assets (such as art or jewellery)
Managing your SIPP
Unlike a private pension, which you pay the pension provider to manage on your behalf, you manage the pension yourself and have control over which pension funds and assets you invest in. If you don't want this responsibility, you can pay a money manager to make investment decisions for you.
Because managing a SIPP is more 'hands-on' than with a standard pension, you have some responsibility in that you must keep an eye on its performance and make ongoing decisions about your investments. You should be able to do this online.
Depending on the provider you choose, you may find that making frequent investments could be costly. Again, a money manager could help you devise an effective investment strategy.
How do I set up a stakeholder pension?
A stakeholder pension is a simple, relatively low-risk way of saving for retirement. It's designed to be very accessible and flexible, particularly for people who are self-employed or on a low income and who may not meet the conditions of other pension schemes.
Stakeholder pensions have to meet a set of minimum requirements (see Costs of setting up a stakeholder pension below).
One benefit of a stakeholder pension is that other people (such as a spouse or partner) can also make contributions to it.
Some drawbacks are that your choice of investments is typically more limited than with other pension plans, and your returns are likely to be lower because of the fairly low level of risk.
What does it cost to set up a pension?
All pension plans come with charges, but how much you pay will depend on what fees your chosen provider has set. Here are some of the most common pension fund charges:
Annual management fee: A charge for managing your pension. It includes things like admin expenses.
Underlying fund fee: A charge, made on top of the annual management fee, that covers the money managers.
Service or policy fee: Another separate admin charge.
Inactivity fee: A penalty the provider applies if you stop paying into your pension.
Contribution charge: A percentage taken every time you pay into your pension. Not so common nowadays.
Exit fee: A fee to withdraw or transfer your savings.
Platform fee: Some providers add this essentially for the privilege of using their service.
Before you set up your pension, you should find out what charges the provider will impose, as they can have an impact on the amount you save. Sometimes, pension providers will hide fees in small print, so always read documentation carefully.
As an example, PensionBee charges a single yearly fee for managing your pension. Other providers charge differently.
Learn more about pension charges
Costs of setting up a SIPP
With a SIPP, you usually have the choice between a 'full SIPP' and what might be called a 'low cost' or 'lite' SIPP. The full SIPPs tend to be for people who have built up a substantial pension pot – they offer a wide choice of investments but typically incur a high set-up fee, an annual management fee and significant fees for trading (buying and selling shares, for instance).
The 'low cost' SIPPs generally carry lower fees for trading and lower yearly admin charges. It's also common for them to cost nothing (or very little) to set up.
There are lots of different SIPPs available and they have different charges, so always check and compare before you commit.
Costs of setting up a stakeholder pension
With stakeholder pensions charges, the government has set rules that pension providers must keep to when offering these pensions. These include the following:
Capped annual management fees: Providers can't charge more than 1.5% a year for the first 10 years and 1% a year thereafter. Also, they're not allowed to charge you for transferring another UK pension into your stakeholder pension.
Minimum contributions: Your stakeholder pension must have a minimum contribution level set at £20 or less, no matter how you make your contributions (as one-off payments or as part of a regular plan). You must also be able to stop or restart your contributions at any time without charge.
Default investment fund: If you don't want to choose how your pension is invested, the provider must have a default fund that you can invest in. This should have a lifestyling option, which automatically moves your money to lower-risk investments as you approach retirement.
Tax relief
One significant benefit of saving into a pension is the tax relief you receive on your personal contributions. To read more about tax breaks on pensions, see part 1 of this guide.
*This guide is sponsored by PensionBee. As with all investments, capital is at risk and the value can go down as well as up.
In part 3 of this guide, we look at how you make pension contributions.
Read the other parts in this series:
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