Pensions for self-employed people – Part 5: Retirement planning

Pensions for self-employed people – Part 5: Retirement planning
PensionBee Ltd
PensionBee LtdOnline pension provider

Posted: Wed 11th May 2022

In part 4 of this guide, we looked at how to trace past pensions, as well as what services are available to help you track down any lost pension pots. Consolidating your pensions is just one aspect of planning for retirement.

Planning to retire means considering how much you'll need to maintain a comfortable lifestyle when you're no longer working. Once you know that, you can start to take action to give yourself the biggest possible pension pot in retirement.

In part 5 of our six-part guide, we cover how to work out your ideal retirement income, how to calculate what your existing pensions (plus State Pension) will likely provide, and how to make a retirement plan.

Listen to episode 2 of PensionBee's Pension Confident Podcast: Keeping your self-employed pension on track

When should I start planning for retirement?

A general recommendation is to start your retirement planning as early as possible. After all, the longer you have to make contributions to your pension, the more you'll have in your pension pot when you finally retire (see What is a good pension pot? below).

Remember: as someone who's self-employed, you won't have a workplace pension, just the personal pension (or pensions) you set up and pay into yourself.

Depending on your age right now, there are things you can be doing to make sure your retirement income will be enough for you to enjoy the lifestyle you want.

If you're in your 20s

Make sure you have a personal pension set up. If you're able to, begin clearing any debts.

At this stage, you should also think about what size pension pot you'd like to have when you retire, and what type of plan would be best for you. To help with this, you can check the State Pension forecast and use a pension calculator to work out what you'll need to pay into your personal pension.

And look to start your contributions as soon as possible. Starting early with just a small regular payment will benefit you in the long run thanks to compound interest.

If you're in your 30s

Though you might have other life priorities that place demands on your finances, keep up with your pension contributions if you can.

If you chose a balanced investment strategy when you first set up your pension, an alternative approach could be to invest a higher proportion of your savings in equities (stocks) that typically offer greater potential for higher returns.

While these funds tend to carry more risk, because retiring is some way off, you have more time to ride out any potential short-term losses. You can also switch to a more conservative plan as you get nearer to retirement.

If you're in your 40s

Take the time to review the size of your pension pot and how the provider is investing your money. If you have the income to do so, consider increasing your pension contributions.

Finally, if you've worked for employers at some point in your life, make sure you know where any old workplace pensions are and think about whether it may benefit you to consolidate them.

If you're in your 50s

It's best to begin retirement planning as early as possible, so by this point you should be well on your way to building a sizable pension pot.

Use the government's online service to check your State Pension forecast, so you have a better idea of how much State Pension you could get and when. If you need to, consider exploring voluntary National Insurance contributions to top up your State Pension. Again, if your earnings allow it, think about increasing your pension contributions further.

At this point, you should know when you intend to stop working and how long you expect your pension to last. Ideally you'll continue to clear any outstanding debts you may have, before you retire.

Importantly, be sure to consider your pension options – will you buy an annuity (see What is an annuity? below) or choose income drawdown, for example?

How much money will I need to retire?

Quoting an exact figure is difficult, as it all depends on:

  • what kind of lifestyle you want when you stop working

  • your circumstances – for example, do you have any dependants? Have you paid off your mortgage?

However, the earlier you start paying into a pension, the more likely it is you'll be financially comfortable in retirement. It's all about giving your pension as much time as possible to grow.

Learn more about how much you need to retire

What is a good pension pot?

A good pension pot is one with enough money to give you a comfortable income in retirement. Your pension pot is the total value of your pension at any point in time.

However, it's more commonly used to describe the final value of your pension before you start to withdraw an income in retirement. It includes:

  • all the contributions you (and any employers you've had) have made over time

  • top-ups the government has made (through tax relief, for example)

  • the growth in the value of your investments

It doesn't include the State Pension, which is calculated separately.

Use PensionBee's Pension Calculator to work out the value of your pension pot

How long will I need my pension?

The current life expectancy in the UK is a little over 81, so it's likely you'll need your pension pot to support you for around 25 to 30 years, depending on when you retire.

Although there's no limit to the number of years you can claim State Pension (worth £9,627.80 a year in 2022/2023), you'll need to top up that amount with another source of income if you're going to cover more than just the essentials.

How do I work out what my final pension will be?

There are a number of things you can do to work out how much money you're likely to have when you retire. As mentioned above (see When should I start planning for retirement?), it's useful to begin this kind of financial planning as early as possible.

Get a State Pension forecast

This will tell you how much State Pension you might get. It's based on your National Insurance contributions to date, and is an estimate rather than a truly accurate calculation.

You can check your forecast for free on the government's website. If you're not already registered with an online government service and don't have a Government Gateway ID, you'll need to sign up first.

Once registered, follow the simple on-screen instructions to generate an online forecast of your State Pension.

Find out what your pension pot is worth

Your pension provider should send you a pension statement every year showing how much is in your pot. (If you don't receive any statements and you've moved house over the years, it might be because the provider doesn't have your latest address.)

If you're over the age of 50, visit PensionWise for free advice on your retirement options.

Consider your other savings and income

While you have your pension as your retirement nest egg, perhaps you have other savings, investments and income as well? These all count towards your retirement income so make sure you consider them when doing your retirement planning calculations.

Find your lost pensions

If you've worked other jobs in the past and joined workplace pension schemes, you might want to consider tracking down those old pensions and consolidating them into your current pot. We explained how to do this in part 4 of this guide.

What is an annuity and should I buy one for retirement?

An annuity is a financial product designed for people who want to receive a guaranteed income in retirement.

When you buy an annuity, you're essentially paying a lump sum of money from your pension to an insurer. In exchange, the insurer pays you a fixed income every month for a set period or the rest of your life.

You can use some or all of your pension to buy an annuity, and providers generally offer two types:

  • Lifetime annuity: This guarantees you a fixed income for the rest of your life.

  • Investment-linked annuity: This pays a regular income that can rise and fall (depending on how investments perform) but will never fall below a certain amount.

If you choose to buy an annuity, there are pros and cons to consider.

What is flexible retirement?

Flexible retirement is when you reduce the hours you work and boost your income by taking money from your pension. Because working fewer hours can lower your income considerably, the idea is to supplement it by drawing down cash from your pension while continuing to work.

It's an option for people aged 55 and over, but it does have its drawbacks. For example, you might end up paying more income tax because your combined income from your employment and pension withdrawals pushes you into a higher tax bracket.

And as you're accessing your pension pot early, you're taking money from it and giving it less time to grow, which could affect your income later in life.

Learn more about flexible retirement

Can I take my pension early and still work?

You can start drawing from a personal pension at age 55 (rising to age 57 from 2028) and still work. Keep in mind though that your provider may charge a penalty for this benefit.

There are some circumstances in which you may be able to access your pension even sooner – for example, if you have to retire early due to ill health.

There are things to consider when taking a pension early. You're allowing it less time to grow, while also reducing your income in retirement. You may also end up paying more tax because your current income has increased.

If you choose to take your pension at age 55 and continue working, you have a few different options:

  • Withdraw the whole lump sum

  • Withdraw some of the pension pot and leave the rest invested

  • Withdraw some of the pension pot and buy an annuity with the rest

Learn more about taking your pension early

Can I delay my pension?

If you're approaching retirement age but aren't ready to stop working, you can delay taking your personal pension and defer your State Pension. Doing this has the following benefits:

  • You're giving your pension longer to grow

  • You can continue to invest in 'riskier' assets before moving to safer ones later

  • You'll receive tax relief on pension contributions until age 75

  • Deferring your State Pension can increase your payments

Learn more about delaying your pension

Can I release equity for retirement?

If you own your home, you can release some of the property's value (called equity) to top up your pension pot. This is known as equity release.

Using equity release to provide income in retirement can be useful if you have a shortfall in your pension savings. When releasing equity for retirement, you have two options:

  • A lifetime mortgage – a loan against the value of your house

  • A home reversion – when you sell part of your home, while continuing to live there

Learn more about releasing equity for retirement

*This guide is sponsored by PensionBee. You should not regard anything in this blog as financial advice. And when you’re investing, as with all investments, capital is at risk and the value can go down as well as up.

In the sixth and final part of this guide, we look at how you can withdraw your pension.


Read the other parts in this series:

PensionBee Ltd
PensionBee LtdOnline pension provider

You might also like…

Get business support right to your inbox

Subscribe to our newsletter to receive business tips, learn about new funding programmes, join upcoming events, take e-learning courses, and more.