5 Ways to save for retirement when self-employed

If you’re self-employed and wondering how to save for retirement, you’re not the only one. 

While the onset of the pandemic saw a dip in those claiming self-employed status, self-employment has still surged by roughly 30% in the UK over the past 30 years (via Statista). That’s a lot more people who aren’t paying into an employer-backed pension, looking for sensible places to put their cash and save for the years ahead. 

But where should you actually start? Especially at times of high inflation and low savings rates, putting cash in a simple savings account, where it grows at a slower pace than the price of everyday goods, can feel pretty futile. More volatile investments, meanwhile, can mean your savings go down in the short-term.

As always, it’s helpful to have a diverse portfolio of investments and savings accounts—so you aren’t putting all your eggs in one basket.

I became self-employed during the pandemic, and suddenly had to grapple with what financial decisions made sense for the long-term—saving up for a retirement in the (hopefully not too distant) future. Here’s everything I learned that I wish I’d known at the start.

The first thing is to consider whether you already have a pension pot in play. If you’ve just left a full-time job, you may have been paying into a pension provider already, such as The People’s Pension—with your employer paying a small amount into the pot each month alongside.

Whether or not you decide to keep paying in without your employer bonus, any pot you’ve accumulated will still accrue interest over time, though there are other places to consider putting your money going forward, especially as you won’t be able to withdraw from this pot before the age of 55 (at least, not without a hefty tax).

One of the best savings options in the UK is the Lifetime ISA. You can only put in £4,000 per year, but the government will add a 25% bonus for whatever you put in. 

There is one catch—you can only access this money to retire at the age of 60, or to purchase a property under £450,000 as a first-time buyer. So there are big returns for this option, but also strings attached, and taking out the money for any other reason will see that government-backed bonus removed.

Note that you can only open a Lifetime ISA if you’re aged 18-39, too, and can’t pay in anything else after the age of 50. A great option for younger investors or first-time buyers that gets a bit limiting as time goes on.

A stocks and shares ISA is a great option when saving towards retirement. That’s because you can put in £20,000 a year into a stocks and shares ISA without paying any kind of tax on your returns.

ISA providers will let you choose your risk level, though there’s always some danger of your investments dropping at some point, even if it balances out in the long term.

An alternative is a cash ISA, which is a kind of savings account where you don’t pay tax on any savings returns—though the returns will generally be higher in a normal savings account (see below).

That £20,000 limit covers any ISAs you have, though, so if you’re putting £4,000 into a Lifetime ISA, you only have £16,000 of your tax-free allowance left for that year. 

There are multiple kinds of savings accounts, of which we’ll give a brief overview. 

Instant-access savings accounts work a lot like checking accounts—you can deposit or withdraw cash whenever you want, with a small annual return that makes it somewhat better than leaving oodles of cash in your (0% return) checking account.

Some easy-access options let you transfer money within a couple of business days, and will usually have a slightly higher return: at the time of writing, both instant and easy-access accounts generally give you around 3–4.5% annual returns, with a lot of flexibility.

Fixed-rate savings accounts have more restrictions, and don’t let you withdraw cash until you’ve reached the end of an agreed period of time, ie, 12–24 months. You get less flexibility, but usually higher returns (up to 7%). This is a better option in the long-term, but you need to make sure you have enough cash accessible elsewhere, in case you need it at short notice. 

Premium bonds are a highly popular savings option in the UK, due to its low levels of risk. These government-backed bonds are worth £1, with each bond being entered into a monthly lottery that has the potential for big winnings (up to £1,000,000 for the biggest prize, though most prizes are a meager £25 a pop).  

On average, bond holders will get back an annual 3.3% return—though most people will “win” little to nothing each month. There’s no danger of losing money, and any winnings are tax-free, making this a stable savings option. Just keep in mind that you can’t hold more than 50,000 premium bonds at one time. 

With inflation being what it is, any savings accounts or cash ISAs being offered right now are likely to see the worth of your savings slowly eroded over time.  

The real gains in the long term will come from Lifetime ISAs with their 25% government bonus, if you are saving specifically for retirement or a first-time house purchase, as well as Stocks and shares ISAs, with a large £20,000 tax-free allowance each financial year to make use of. 

If you want more certain returns in the short-term, then savings accounts are the way to go—while premium bonds offer a zero-risk avenue to potentially large gains. But as always, having a mix of the above is the best way to ensure no single investment lets you down. 

HOW WE CAN HELP 

If you need expert advice or help and support with your pension and retirement planning from a trustworthy source, contact Unbiased today.

Read more: 7 Pension mistakes that could destroy your retirement

Read more: Why you shouldn't stop paying into a pension

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