3 tips to build your Pension in the UK

Hello Stoic Investors,

Today, I want to answer a question I often get from self-employed students:

"How do you build a pension when you don’t have access to a public pension?"

I recently came across a post on Reddit that describes exactly this situation, and it’s something many of you might face. 

Here’s what the post says:

Let's analyze the key points you need to know when you're self-employed and planning to build a pension for your future.

Personal Pension vs SIPP: What’s the Difference?

When you're self-employed, your two main options for a pension are Personal Pensions and Self-Invested Personal Pensions (SIPP), as mentioned in the Reddit post.

Choosing the right one depends on how much control you want to have over your investments.

1. Personal Pension:

This is a pension where you make regular contributions, and the provider manages everything for you.

You won’t have to worry about picking investments because the provider will handle it.

They choose a mix of funds based on the level of risk you're comfortable with.

It's a simple, hands-off option, which sounds great at first, but the downside is that you don’t have control over how your money is invested.

While it's very common for employees, it's quite hard to set up as self-employed.

2. Self-Invested Personal Pension (SIPP):

This option gives you full control over your pension.

With a SIPP, you can choose where to invest your money—whether that’s in stocks, index funds, ETFs, or even property.

This flexibility means you can tailor your pension to match your goals and risk tolerance.

While this might sound like a disadvantage because it requires more effort and knowledge, the big advantage is that you have complete control over your pension.

If you're willing to take the time to learn about investments or have a clear strategy in mind, a SIPP lets you make the most of your pension.

Both types of pensions offer tax relief, which means that the government adds money to your contributions.

For example, if you contribute £100, the government will add £20, making the total £120 in your pension.

This is because the government essentially gives you back the tax you would have paid on that amount.

In addiction, when you're ready to access your pension (usually from age 55, and it will likely be 57 from 2028), you can take up to 25% of your total pension pot as a tax-free lump sum.

This means you can withdraw one-quarter of the amount you’ve saved without having to pay any income tax on it.

The remaining 75% will be taxed as income when you start taking withdrawals, just like regular earnings.

For example, if your pension pot is £100,000, you can take £25,000 tax-free. If you withdraw the remaining £75,000 over time, it will be taxed at your income tax rate.

Ultimately, the choice between the two depends on how much you want to be involved.

If you prefer a simple, hands-off approach, a personal pension could be a better fit.

If you want more control and are comfortable managing your investments, a SIPP might be right for you.

How to Contribute and Invest

Once you've chosen between a Personal Pension and a SIPP, the next step is understanding how to contribute and invest your money.

1. Contributing to a Personal Pension:

With a Personal Pension, you can make regular contributions, either monthly or as lump sums.

However, there is an annual limit on how much you can contribute and still receive tax relief.

For the 2025/26 tax year, the limit is £60,000. If you earn less than £60,000, you can contribute up to 100% of your income.

Once you’ve made your contributions, the provider will invest the money for you.

The main thing to keep in mind here is that you don’t have control over where your money goes—the provider will decide on the investments based on your chosen risk level.

The provider usually invests in a mix of funds, so your money will be spread across different assets.

This can reduce risk, but it also means you won’t have a say in the individual investments.

2. Contributing to a SIPP:

With a SIPP, the contribution limits are the same as for a Personal Pension.

The key difference with a SIPP is that you have full control over your investments.

This means you can choose exactly where your money goes—whether it's in stocks, bonds, ETFs, or even property.

While this gives you more flexibility, it also means you need to take the time to decide where to invest.

As a beginner, a good place to start is with low-cost index funds or ETFs.

These funds automatically track a broad market index, providing diversification (spreading your investment across many companies) and reducing risk compared to picking individual stocks.

As you learn more about investing, you can gradually expand your portfolio to include other asset classes.

However, deciding what and how to invest is a much more precise discussion that needs to be made after first clarifying your goals, risk tolerance, and time horizon.

Taking the time to define these factors will help you build a strategy that suits your needs!

Looking to the Future: The Power of Compound Interest

When you invest for your pension, the real magic happens over time through compound interest.

This is when the returns you earn on your investments begin to earn their own returns, creating a snowball effect.

The longer you leave your money to grow, the more powerful compound interest becomes.

Starting as early as possible and contributing regularly to your pension can make a big difference. Even small contributions can grow significantly over time, especially if you’re consistent.

The earlier you begin investing, the more time your money has to grow with the help of compound interest.

Building a pension as a self-employed individual can feel like a daunting task, but with the right information, you can take action and start planning for your future.

Remember, the choices you make about your pension should align with your personal financial goals, risk tolerance, and how much time you want to dedicate to managing your investments.

These are general guidelines, and every decision should be tailored to your individual circumstances.

Whether you choose a Personal Pension or a SIPP, it’s important to think carefully about your options in order to make the right choice for your future!

So, note down these three key-points and start thinking about your future today:

1. A Personal Pension is a hands-off option where the provider manages your investments based on your risk level;

2. With a SIPP, you have full control over your investments, allowing you to choose where your money goes, but it requires more involvement;

3. Whether you choose a Personal Pension or a SIPP, the key is to contribute consistently, allowing compound interest to grow your savings over time.