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A brief guide to pensions for freelancers and the self-employed

While employees are automatically enrolled into a workplace pension scheme, self-employed people must choose to enrol themselves. As a result, they don’t always think about paying into a pension.

Mike Burton was self-employed until he joined Nest as a content writer. Here, he shares the crucial things self-employed people need to know about pensions so they can save for retirement with confidence.

I must confess, I freelanced for four years and didn’t pay into a pension once. Not a penny. The thought never even entered my mind.

That’s four years of missed contributions. Four years in which I could have had financial experts working hard to grow my money. And four years of tax relief I missed out on. Ouch.

There’s an overwhelming number of tasks to wrap your head around when you go freelance. How much should you charge? How do you get – and keep – clients? Those two questions alone will keep you busy for the first year.

Then there’s the ‘feast or famine’ cycle that’s all too common for freelancers. One minute I felt like a rockstar, sipping cocktails and dining out, the next I was eating supermarket soup, wondering if anyone would ever hire me again.

This cycle of uncertainty makes putting money aside for retirement a tough sell. Parting with cash when you don’t know if the work will keep coming is a daunting prospect. But it doesn’t have to be.

Since joining Nest, I’ve learned things about pensions I wish I’d known four years ago. If I’d known then what I know now, I’d have had a completely different attitude towards saving for retirement.

Here are the crucial things you need to know about pensions so that saving for retirement feels less scary.

Pay in a way that works for you

Most employees contribute a minimum of 8% of their earnings to their pension scheme, which includes 3% from the employee, 4% from the employer and 1% tax relief. However, you have much more flexibility as a self-employed person. 

You can pay into your Nest pension pot as little or as often as you like, and you can also choose how much you pay, so long as it's at least £10 each time.

This flexibility lets you save for retirement in a way that works for you and your business. You can choose to set up a direct debit for a regular amount or you might choose to contribute less during quieter months and then increase the amount when business is booming. Or you might prefer to pay a lump sum once a year after completing your tax return.

Get topped up by the government

If you’re eligible, the government adds at least 20% tax relief to every contribution you make, which means you get extra money in your pot.

Let’s say you contribute £100 to your pension. Nest automatically claims 20% tax relief and adds £20 to your pot. If you're a higher earner and in a higher tax band, you can claim anything above the 20% tax relief in your annual tax return.

Explore tax relief in more detail

Financial experts invest your money

You might assume, as I did, that a pension is like having a savings account that you can’t touch until you retire. So you might be surprised to learn that financial experts work hard on your behalf to grow your money.

They invest your pot in things all over the world – such as property, construction, and technology – that they expect to increase in value over time.  Investments can go down of course; growth is not guaranteed but Nest has an award-winning investment approach. Its flagship Nest Retirement Date Fund aims to grow your savings to provide you a stable and sustainable income when you retire.

Paying into a Nest pension could be a great way to save for your future.

Learn more about how Nest invests your money

Discover the power of compound growth

The longer you leave money in your pension the more compound growth you could generate. This is because your money is invested and any profit made is then re-invested, along with the original investment, and could earn more profit, and could keep growing year on year.

Imagine you saved £1000 and made 5% in investment returns after a year. You’d have £1,050 – the original £1000 plus £50. That money is then re-invested and earns another 5%. A year later you’d have £1,102.50. If the same thing happened again, the next year you’d have £1,157.63.

See how it works? Imagine this happening over decades.

Once you understand compound growth you realise why it’s hugely beneficial to start paying into a pension sooner rather than later. A pension is a long-term investment and there are reasons why you might not have been able to save before of course, and that’s fine. There’s no bad time to start saving. It’s also important to note that like any form of investment, returns are not guaranteed, and your pot value will sometimes fall. However, it’s worth remembering that falls tend to be short-term and your pension is a long-term investment. 

Discover more about compound growth

How much should you pay into your pension?

The amount you choose to contribute will be influenced by factors such as your age, income, and your vision for retirement. If you’re unsure, it might help to see how contributions work for employed people. 

Employees pay a minimum of 8% of their earnings into their scheme, with their employer paying at least 3% of this. As we mentioned above, self-employed people only need to make a minimum contribution of £10 each time you pay into your pot. However, some self-employed people find it useful to calculate 8% of their income. Others prefer to use a pension calculator to work out their pension goal and work backwards from there.

 Check out Nest’s pension calculator too. It gives you an idea of how much regular contributions could add up to when you retire.

Start saving today

Whether you’re running your own business or going solo as a freelancer, Nest offers an award-winning pensions scheme for all.

We know your time is precious, so we’ve made it super simple to sign up and start contributing. Just use our self-employed checklist to make sure you're eligible, then complete our short sign-up form and start contributing in a way that suits your unique freelance lifestyle.

Join 12 million other Nest members

Published 27 February 2024

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