Self-employed pensions: how I’m using a SIPP for my retirement

I love being self-employed. After five years, the novelty of being my own boss is yet to wear off. I don’t have to feel guilty about taking time out to walk my dogs, I can be on hand for the kids when they need me and I can duck out to meet a friend for a coffee. A deadline is, of course a deadline, but I get to manage my time myself.

But however much I love running my own business, there are lots of things I miss. At first it was the office chit-chat, the after-work drinks and the never-ending stream of cake, but as the years have rolled on, what I have truly come to miss is something that I never fully appreciated at the time and that’s a good company pension.

Call me a nerdy middle-aged pensions writer, but if self-employment has taught me anything, it’s that it really is the ultimate work perk.

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When you’re employed you’ll be auto-enrolled on to a workplace pension and paying a minimum of 8% of your qualifying earnings into your retirement pot. That includes at least 3% from your employer but, if you’re lucky (as I was), you could get significantly more with generous businesses matching or sometimes exceeding employee contributions and basing them on your total salary, rather than just your qualifying earnings (currently the range between £6,240 and £50,270).

But of course, like most people, I didn’t pay a massive amount of attention to my workplace pension while I was employed; it was just something that was bubbling away in the background.

However, when I went freelance, I knew my pension was something I was going to really have to think about. Retirement planning is my specialty so not only was a lack of pension a bad look professionally, I was also being reminded of the importance of saving into one on a daily basis.

Thankfully, I had a bit of money in a self-invested personal pension (SIPP) already, so I had a pot ready and waiting. And I quickly made the decision to transfer my old workplace pension into it.

That move has saved me a fortune in fees, but even though my pot needs as much help as it can get, it wasn’t just about the money.

For me, the most important thing was just being able to see all my money in the same place and be able to manage it online.

But as pleased as I was to have taken this step, setting up a pension is the easy bit. It’s the contributing that’s hard – especially when you’re self-employed.

Between 2011 and 2019, there was a tenfold increase in the number of people saving for retirement in defined contribution (DC) workplace pensions, thanks to the introduction of auto-enrolment.

This means employed people no longer have to make a conscious decision to save for retirement. Most people will be signed up to their workplace pension – and have monthly contributions deducted from their salary automatically – unless they decide to opt out.

It’s hardly surprising then that 78% of employed people are saving into a pension, compared to just 31% of self-employed workers, according to a report from IPSE, The Self-Employment Association.

If you’re self-employed, it’s down to you to not just choose and open a pension, but to pay into it too.

And that’s easier said than done when you’ve got a fluctuating income – as I’ve discovered.

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Overall, I’m proud to say, my business has done pretty well (so far, touch wood) – but there are often huge swings in what I make on a monthly basis. In a good month, I can earn triple what I get in a bad one, which doesn’t make it easy to decide how much I can comfortably afford to save into a pension.

Rightly or wrongly, I’ve played it safe. I’m ensuring some money goes into my pension each month, but not so much that I’ll struggle to pay more pressing bills if work is a bit quiet.

But that strategy meant my first tax return was quite dispiriting, despite my efforts. Self-assessment provides the self-employed with a useful prompt to review their pension: if you pay higher or additional rate tax, you’ll need to declare your contributions on your tax return to make sure you get the rate you’re entitled to (personal pensions like SIPPs, can only apply basic rate relief automatically).

Yes I was making regular contributions into my SIPP – and ticking the retirement saving box – but the amounts going in paled in comparison to the sums I was saving when I was employed, even though I was now earning more.

What felt like a reasonable contribution, was now looking a bit feeble in black and white.

My strategy might give my day-to-day finances a bit of breathing space (and keep my stress levels down), but it’s not doing enough for my future. I’ve learnt that if I want a decent income in retirement, I’m going to need to pay in more and think beyond monthly contributions.

I do try to make hay when the sun shines and pay a little extra into my pension when I can. The beauty of my SIPP is it’s easy to make ad hoc contributions on top of my monthly payments. The problem, of course, is that if I have had a good month, or feel like I have some cash to spare, it does take a hefty dollop of willpower to pay it into my pension.

I’ve discovered that I need to be a bit creative and look for ways that make retirement saving feel more like a win and less like a chore. For me that means focusing on tax relief on contributions: comparing the value I’ll get if I take that money as income now or what I’ll get if I set it aside for retirement.

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So, over the years I have used my tax return as a prompt to pay an extra lump sum into my pension. That always feels like a nice dopamine hit: I’m putting money away for my future and reducing the amount of income tax I’ll need to pay – which again, is a big sting that self-employed people need to save and budget for, as it’s not deducted automatically by PAYE. The smaller that tax bill is, the better.

Another recent tactic has been to embrace automated saving. I’ve got an app that uses open banking technology to monitor my spending in my current account – it then uses artificial intelligence (AI) to work out what it thinks I can afford to save each week and moves that money into a separate savings account automatically. Sometimes it takes out about £50, other times it’s less than a tenner – it all depends on how much is going on that week.

I call that money my “employer contribution” and every time my balance reaches £500, I pay it into my pension. It works because I don’t need to think about it – the money is taken out of my account automatically and it’s never left me short or forced me to claw the money back.

Of course, I still do need the discipline to pay that money into my pension, but it’s a whole lot easier when I didn’t really notice the money leave my account in the first place.

I’m proud of the pot I’ve managed to build so far, but with the system stacked against self-employed workers like me, it does feel like hard work. Just like my business, it’s wholly on me to make it a success.