Fintech founder: “Pension age hikes are liquidity traps for freelancers and founders”
Self-employed workers are predicted to have a £208,500 pension deficit compared to employees. Here we share the many reasons why the self-employed do not save as much for their retirement as employees, and how that could be turned around.
The average pension pot for a self-employed worker in the UK could sit at just £50,700 at retirement. That’s about 15% of employees, a shortfall of £208,500, according to research carried out by business lender Funding Circle, using HMRC pension statistics.
Arguably, employees benefit from automatic enrolment, which ensures regular contributions from both workers and employers. As a result, around 88% of employees are now saving for retirement through workplace pensions.
The picture looks very different for the self-employed. Only one in five currently contributes to a private pension. Rising business costs, irregular income, Inside IR35 earning adjustments and taxes, alongside inflation, are forcing many to sacrifice their retirement savings just to stay afloat.
The traditional advice assumes a 40-year corporate salary. We don’t have that luxury.
–Sophia Lan, Founder of WInvest Collective
Pension age does make a difference
“For founders and freelancers, pension age hikes aren’t just retirement problems—they’re liquidity traps,” shared Sophia Lan, Founder of WInvest Collective, in a LinkedIn post.
“The traditional advice assumes a 40-year corporate salary. We don’t have that luxury,” she wrote.
When Lan one night did the math on the new UK personal pension access age rising to 67, she couldn’t sleep.
Lan is listed on Forbes’ 30 Under 30 Finance Europe list. She, like many her age, is expecting the retirement age to be higher by the time she retires.
“I realised my own timeline is broken. I’m building a fintech for the next generation’s wealth, but my spreadsheet shows I won’t access my own pension until 60+. That’s 30 years of locking away capital I might need if WInvest hits a rough patch in year 7.
– Sophia Lan
Get self-employed savvy
Lan decided to rebuild her personal strategy. Here is what Lan is doing differently:
1. Maxing my ISA allocation as much as I can before any pension contributions. With the UK deficit at £20bn, tax-free allowances feel like political bargaining chips. I’m treating my £20k ISA limit as use-it-or-lose-it—this year, next year, every year.
2. Front-loading compound growth. I ran the numbers: £20k/year at 8% return = £1m tax-free in 20 years. Even 10 years of contributions, left to grow for another 10 = £630k. That’s not theory; that’s my emergency fund if this startup fails.
Freelancers and founders who do not build up their personal pensions and ISA savings could be left overly reliant on the State Pension, which may be very hard to live on comfortably if no other source of assets or income is available.
Private pensions: How much do the self-employed contribute?
If you question whether fellow freelancers manage to save into a private pension, they do. Self-employed individuals contributed £2.7 billion to private pensions in 2023–24, up from £2.3 billion the previous year. Yet, despite this modest growth, participation remains low.
According to the Institute for Fiscal Studies (IFS), 63% of self-employed workers are projected to fall short of their target replacement rate – the level needed to maintain living standards in retirement.
The IFS said in the report:
While many self-employed workers save for retirement in other ways, it is striking that successive governments have put in place structures – through automatic enrolment – to make it much easier for employees to save in a pension scheme, but have not facilitated anything like the same assistance for the self-employed. In our judgement, the status quo, in which self-employed workers have to arrange their own pension plans, is not fit for purpose.
The IFS also notes that only around 20% of the self-employed now save into a private pension, and even among those who do, over a quarter make unchanged contributions for five years, meaning their savings are effectively shrinking in real terms.
At the same time, 66% are not expected to reach the Pensions and Lifetime Savings Association (PLSA) minimum standard of £13,400 a year (single pensioner, outside London).
Reasons why the self-employed save less into their pension
While 20% of self-employed individuals are reported to be saving into a private pension scheme, there are reasons why they may not be investing in this way.
Automatic enrolment: why the self-employed need to set up their own
Employees are automatically enrolled in workplace pensions, while the self-employed must set one up themselves. This lack of automation requires individuals to seek out which pension provider to choose; with no HR department or employer scheme, choosing and managing a pension can feel daunting.
Irregular income: don’t use it as an excuse, use it strategically
Variable earnings make it harder to commit to regular pension payments. Often self-employed income can fluctuate month to month or seasonally; this variability can make consistent payments difficult. In tighter months, contributions are often paused or reduced. Yet, unlike an employee you can take on more projects, boosting your earning power. Use those as opportunities to save into your tax-efficient pension pot. You can even contribute to your pension via your limited company and receive tax relief.
Cash flow pressures
Many self-employed workers have prioritised business costs, taxes and daily expenses over long-term savings. Since the benefits of a pension are years away, the incentive to contribute may feel less urgent. However, if you have a pay your pension first mindset through a standing order while frequently questioning any business costs that could be eliminated or renegotiated, you could start to build up and justify the importance of your pension savings.
Alternative retirement expectations
Some self-employed people believe they can rely on selling a business, property, or other investments instead of a pension. This can reduce motivation to contribute regularly. While this could seem like a sure-fire way to have a pension pot (e.g., property equity), timing is everything. If you can’t sell and at the right price to give you a comfortable retirement income, then what?
Tax trade-offs: there’s more than one
Although pension contributions are tax-deductible, many prefer to reduce taxable profits through immediate business expenses rather than deferred savings. Why not reconsider more tax-efficient ways to save for your future, like putting more in an ISA?
Psychological barriers
Contributing to a pension is often “invisible” money that you can’t access until retirement. For people managing their own finances daily, this can feel less rewarding than saving in accessible accounts.
The retirement deficit
At current saving rates, self-employed workers could retire with £10,000–£11,000 less per year than their target income, even after receiving the full State Pension. Employees, supported by automatic enrolment and employer contributions, are far more likely to meet their retirement goals.
Here is an example, the Funding Circle research provided:
- Assume a typical 40-year working life (from age 25 to 65). Employees benefit from automatic enrolment, with around 88% taking part and contributing an average of £3,000 per year. For the self-employed, participation drops to just 20%, with average annual contributions of £2,100.
- If a 5% annual investment growth rate over a 40-year career is applied, this results in:
Employees: a pension pot of roughly £318,000, delivering around £12,720 per year in retirement income.
Self-employed: a much smaller pot of around £50,700, providing just £2,028 per year.
- Adding in the full State Pension (projected at £12,547 per year from 2026) gives:
Employees: a total annual retirement income of about £25,267
Self-employed: only £14,575
That’s a £10,425 annual gap, or roughly £208,500 over a 20-year retirement.
The researchers found the gap is driven by two key factors:
- Low participation: only 20% of the self-employed contribute, versus 88% of employees.
- Lower contribution levels: the self-employed typically save £2,100 per year, compared to £3,000 for employees.
You are your business’s future
The solo self-employed want to invest in their business’s future without sacrificing their own. Taking on debt to smooth out the inconsistent income flows or even to grow the business can feel risky. Therefore, if you do consider some financial support, decide to bring on staff or outsource to grow, it would be wise to speak with an independent business financial adviser.
You will want to ask them to assess where your current and future earnings will be coming from and if a financial and/or business insurance product may serve you and your business best.
Will freelancers and founders lose some nights’ sleep about retirement? Surely. It’s what they do the next morning to address their retirement or semi-retirement goals that makes all the difference.
Easier said than done, but sometimes just making a plan, seeing where you could contribute more, and setting up an amount through a standing order to an ISA or private pension provider could ease some of your concerns.