Self-employed? How to avoid a retirement savings shock

Self-employed people are so busy running their own businesses that they could be sleepwalking into a pension nightmare. Only around a fifth of them pay into a pension and even when they do, they pay in less than their employed counterparts. 

On top of that, there’s no employer contribution to make up the difference. It’s no wonder that so many self-employed people risk not being able to afford to retire – especially women who work for themselves.

Why there’s a pension shortfall

Self-employed people earn less on average. There are enormous variations in self-employed incomes, but on average those who work full-time make just £22,800 a year – compared to £29,000 among employed people. And this total is falling – while full-time employees saw their income rise £1,800 between 2023/24 and 2024/25, self-employed earnings fell £1,200 over the same period.

Having less money to go around means having to prioritise the day-to-day essentials and focus on just getting by, so it’s easy to neglect saving for the future. It’s why the AJ Bell Money Matters research found just a quarter of self-employed people prioritise pension contributions – compared to almost a third of employed people. Instead, 35% of self-employed people say they focus on day-to-day living costs, 28% say that just surviving is a priority and 27% prioritise emergency savings.*

It’s not just that these incomes are lower on average, they can also be lumpier, so there are good months and bad months. This makes it more difficult to allocate money to saving into a product where it will be locked up until at least the age of 55 (rising to 57 from April 2028 when the normal minimum pension age goes up). Self-employed people may be more comfortable with saving and investing in ISAs, which give them more flexibility if they have a run of bad months and need to dip in.

Another difficult feature of working for yourself is the lack of an employer safety net, because there’s nobody to offer you sick pay or redundancy pay if things take a turn for the unexpected. The work itself tends to be less secure too, so there’s a higher chance you’ll need the latter. It’s why the AJ Bell survey showed that when self-employed people were saving for the future, they were more likely to prioritise an emergency fund than a pension. Some of this is also down to the fact they don’t benefit from auto-enrolment rules, so instead of inaction leading to automatically joining a scheme at work, inaction leads to not having a pension at all. If they want to pay into a pension, they have to make active choices, and often there’s too much else to worry about, so it takes a back seat.

If they do save, the AJ Bell research shows they tend to pay a similar percentage of their income into their pension as employed people – with the most common percentage at 3% to 5% of someone’s salary. However, given that self-employed incomes are lower on average, this will automatically mean contributions are too. To make matters worse, unless they have set up a business that they work for, there will be no employer contributions to boost their efforts.

Women are particularly at risk. This is partly because they are more likely to work part-time. Stats from the Office for National Statistics show more self-employed women are part-time rather than full-time – whereas more than three times as many men work full-time as part-time. This means there’s even less money to go around, so pensions are easily forgotten.

Women are also more likely to have gaps in their career and may take maternity leave. Unlike employed women, there are no employer pension contributions during this leave, so if they can’t afford to make contributions themselves, there can be complete breaks from contributing to a pension, which takes a toll over time.

It’s worth highlighting that while a pension should be the cornerstone of your retirement income, it’s not the only option. Self-employed people may also have savings and investments or chosen to invest in property to produce a retirement income.

However, they are missing out on the tax benefits of a pension and if they’re saving in cash, they’re missing the growth potential of pension investments. Clearly there remains the risk of a shortfall in retirement.

What should you do?

Pension saving isn’t off the table, even if you have a low and insecure income. You can set up monthly payments into a pension at a modest level that you’re confident you can afford. You can err on the side of caution if you’re worried about locking money away. Then, in good months, you can top it up with lump sums, and in more difficult months you should have the flexibility to pause payments. 

You can put 100% of your relevant UK earnings into a pension, up to a maximum of £60,000. The government will give 20% basic rate tax relief personal contributions and this money also goes into your pension. If you pay more than 20% tax on some of your earnings – because you are a higher rate taxpayer or a Scottish taxpayer, you can reclaim extra tax relief by completing a tax return or contacting HMRC directly. Any extra relief will be returned to you or reduce your tax bill for the year – it isn’t automatically paid into your pension.

Once you’ve started contributions, you can check in before the end of the tax year to see whether you can afford to top them up. If you’re using the new ‘making tax digital’ system, you can do it quarterly when you make submissions. At that point, you can take stock of whether those modest payments were all you can afford, or whether you have the flexibility to increase them a little. Using a pensions calculator can also help work out where you are and how to get to where you want to be.

Discover what AJ Bell’s investors are holding in their SIPPs in our recent article.

For those who are aged 18-39 and are basic rate taxpayers, it could be worth considering a Lifetime ISA. Contributions of up to £4,000 a year are topped up by up to £1,000 from the government. You can make withdrawals tax free from the age of 60. If you are in desperate need, you can access the money earlier – although you’ll pay a 25% penalty that not only removes the government bonus but also some of your own money too. The government has said the replacement for the Lifetime ISA won’t be designed for retirement savings, when it is finally introduced, but if you open a Lifetime ISA now, you will be able to continue to use it as normal.

It is worth noting that a Lifetime ISA has to be funded to be active and if it isn't it may be closed at the end of the tax year.

*Source: AJ Bell/Opinium. Based on a nationally representative survey of 2,000 UK adults carried out online between 2 and 7 April 2026.