How Do I Plan for Pensions and Savings as a Self Employed Worker

At Towerstone Accountants we provide specialist personal tax services, for self employed, and individuals across the UK. This article has been written to explain How do I plan for pensions and savings as a self employed worker, in clear practical terms, so you understand how personal tax and Self Assessment rules apply in real situations. Our aim is to help you stay compliant, avoid costly mistakes, and make confident tax decisions.

Planning for pensions and long term savings is one of the biggest gaps I see when working with self employed clients. From experience, this is rarely down to laziness or lack of intelligence. It is usually because no one ever explains it clearly and because day to day cash flow always feels more urgent than something that sits decades away.

When you are employed, pension saving happens quietly in the background. Contributions are deducted before you see the money, employers top it up, and the system nudges you in the right direction by default. When you are self employed, none of that exists. You are fully responsible for your own future income and unless you build a plan deliberately, it is very easy to drift for years without meaning to.

In this article I want to explain how I think about pension and savings planning for self employed workers in real life. I will cover how pensions actually work in the UK, the options available to you, how tax relief fits into the picture, how to balance pensions with accessible savings, and how to build something sustainable rather than perfect. This is written from first hand experience of advising sole traders, freelancers, contractors, and business owners who want clarity rather than jargon.

Why pension planning matters more when you are self employed

One of the first things I say to new self employed clients is this. You do not have an employer pension anymore, so if you do nothing, nothing happens.

There is no automatic enrolment. There are no employer contributions. There is no safety net quietly growing in the background. Every pound that ends up funding your retirement has to be put there by you, on purpose.

From experience, many self employed people assume they will sort it out later once income is more stable. The problem is that later often turns into never. I regularly meet people in their forties and fifties with good businesses but very little set aside simply because they never made it a priority early on.

The earlier you start, the less pressure there is. Time does far more work than high contributions. Planning early gives you flexibility later, which is exactly what most self employed people want.

Understanding the difference between pensions and savings

Before choosing products, it is important to understand the role each one plays.

A pension is designed for long term retirement planning. The money is locked away until at least age 55, rising to 57 from 2028, and possibly later in the future. In exchange for that lack of access, you get generous tax relief.

Savings are designed for flexibility. You can access the money when you need it, but you do not get the same level of tax advantage.

From experience, problems arise when people put everything into one bucket. Too much pension can leave you cash poor. Too much accessible savings can leave you underfunded for retirement.

The aim is balance, not extremes.

Pension options available to self employed workers

If you are self employed, you still have access to pensions. You just have to set them up yourself.

Personal pensions and SIPPs

The most common option is a personal pension or a SIPP, which stands for Self Invested Personal Pension.

A personal pension is usually more guided, with limited investment choices and lower involvement. A SIPP offers more flexibility and control over how the money is invested.

From experience, SIPPs are popular with self employed professionals because they allow a wider range of investments and can be tailored over time. However, more choice also means more responsibility.

Both types benefit from pension tax relief and work in broadly the same way from a tax perspective.

How pension tax relief works in practice

One of the biggest advantages of pension saving is tax relief.

When you contribute to a pension, HMRC effectively adds money on top of your contribution. Basic rate tax relief is added automatically. Higher and additional rate relief is usually claimed through your Self Assessment tax return.

For example, if you contribute £8,000 into a pension, it is grossed up to £10,000. That extra £2,000 comes from HMRC. If you are a higher rate taxpayer, you may be entitled to further relief.

From experience, many self employed people underuse pensions simply because they do not fully understand this benefit. Pension contributions are one of the few ways to reduce your tax bill while building long term wealth.

How much should a self employed person contribute to a pension

This is the question everyone asks and the one with no single correct answer.

In my opinion, the right contribution is one that you can maintain consistently without harming your cash flow or sleep. A small regular contribution beats a large contribution that stops after six months.

Some people aim for a percentage of profits. Others work backwards from a target retirement income. Both approaches can work.

From experience, starting with something modest and increasing it gradually is far more effective than waiting for the perfect number.

What matters most is starting.

Using pensions as part of tax planning

Pensions are not just a retirement tool. They are also a powerful tax planning tool.

For self employed workers who have a strong year, pension contributions can reduce taxable income and smooth out tax bills over time.

I often see clients use pensions to manage higher rate tax exposure. Instead of paying extra tax and losing the money forever, they redirect some of it into their future.

That said, pensions should not be used blindly just to save tax. Locking money away that you may need in the short or medium term can create problems.

This is why pensions should sit alongside accessible savings, not replace them.

Building accessible savings alongside a pension

While pensions are essential, they are not enough on their own.

As a self employed worker, you need accessible savings for several reasons.

• Irregular income

• Tax bills

• Business investment

• Emergencies

• Periods of illness or time off

From experience, the lack of accessible savings causes more stress than lack of pension savings in the short term.

Emergency funds and short term buffers

I usually suggest building an emergency fund before pushing pension contributions aggressively. This might cover three to six months of essential living costs.

Having this buffer allows you to contribute to pensions with confidence rather than fear. It also stops you having to dip into pensions or take on debt when something unexpected happens.

ISAs and flexible savings

ISAs are often a good companion to pensions. They do not offer tax relief on the way in, but growth and withdrawals are tax free.

From experience, ISAs provide flexibility. They can be used to bridge gaps, fund semi retirement, or support lifestyle choices later on.

For many self employed people, a mix of pensions and ISAs works well.

Planning for retirement without a fixed retirement age

One of the challenges with self employment is that retirement rarely looks traditional.

Many people plan to work less rather than stop completely. Others change the type of work they do. Some want the option to step back earlier if health or circumstances change.

This is why rigid planning often fails. Instead of focusing solely on a fixed retirement age, I encourage clients to think in terms of options.

Pensions provide long term security. Savings provide flexibility. Together, they give you choices.

Common mistakes I see self employed people make

From experience, there are a few patterns that come up repeatedly.

• Putting off pension saving entirely

• Saving only in cash and ignoring inflation

• Overcommitting to pensions and ignoring liquidity

• Chasing complex strategies too early

• Relying on property alone as a retirement plan

None of these are catastrophic on their own, but combined they can create real problems later.

Simple, consistent planning usually beats clever but fragile strategies.

How I suggest approaching this in real life

When I sit down with a self employed client, I usually approach pensions and savings in stages.

First, stabilise cash flow and tax planning. Without this, everything else feels unsafe.

Second, build a basic emergency fund.

Third, start pension contributions at a level that feels comfortable.

Fourth, review and adjust annually as income changes.

This approach recognises that self employment is dynamic. What works one year may not work the next. The plan needs to flex.

Key points to takeaway

Planning for pensions and savings as a self employed worker is not about being perfect. It is about being intentional.

You do not need to solve your entire retirement in one go. You just need to start, review regularly, and adapt as your business and life evolve.

From experience, the self employed people who do best financially are not the highest earners. They are the ones who make steady decisions early and stick with them.

If you are self employed and you have not looked at pensions or savings yet, the best time to start was years ago. The second best time is now.

You may also find our guidance on How can an accountant help me plan for next year’s tax, and How can an accountant help reduce my tax bill, helpful when reviewing related personal tax questions. For a broader overview of Self Assessment deadlines, reporting, and obligations, you can visit our self assessment guidance hub.