New research from Funding Circle, the UK’s leading business finance platform, has revealed the stark difference in pension savings between self-employed workers and employees. According to the data, the average pension pot for a self-employed worker could be as little as £50,700 at retirement, which is only 15% of the average pension of employees.
The study, which used HMRC pension statistics, highlighted the significant shortfall that self-employed individuals could face in retirement, estimating it to be around £208,500. This could leave many reliant on the State Pension alone to fund their retirement.
As the confidence in the State Pension’s future declines, private pensions have become increasingly essential. Through automatic enrolment, employees benefit from regular contributions from both themselves and their employers, with around 88% now saving for retirement through workplace pensions.
However, the picture is quite different for self-employed workers, with only 20% currently contributing to a private pension. The rising costs of running a business, irregular income, and ongoing inflation are forcing many to prioritize their immediate financial needs over long-term savings.
Data from the Institute for Fiscal Studies (IFS) shows that 63% of self-employed workers are projected to fall short of their target replacement rate, which is the level needed to maintain living standards in retirement. The IFS also notes that only around 20% of the self-employed currently save into a private pension, and a quarter of them make unchanged contributions for five years, causing their savings to shrink in real terms. Additionally, 66% of self-employed workers are not expected to reach the Pensions and Lifetime Savings Association (PLSA) minimum standard of £13,400 a year for a single pensioner outside London.
So why are the self-employed saving less for retirement? The lack of automatic enrollment, irregular income, cash flow pressures, alternative retirement expectations, tax trade-offs, and psychological barriers are all contributing factors. Unlike employees who are automatically enrolled in workplace pensions, the self-employed must set one up themselves. This can feel daunting without the support of an HR department or employer scheme.
Variable earnings also make it challenging to commit to regular pension payments, as self-employed income can fluctuate month to month or seasonally. In tighter months, contributions are often paused or reduced. Additionally, many self-employed workers prioritize business costs, taxes, and daily expenses over long-term savings, and some believe they can rely on selling a business, property, or other investments instead of a pension.
Furthermore, while pension contributions are tax-deductible, many self-employed individuals prefer to reduce their taxable profits through immediate business expenses rather than deferred savings. Lastly, contributing to a pension may feel less rewarding for those managing their own finances daily, as the money is “invisible” and inaccessible until retirement.
The retirement deficit between self-employed workers and employees is significant, with employees set to retire with a pension pot of around £318,000, delivering an annual income of approximately £12,720. In contrast, the self-employed could retire with a much smaller pot of just £50,700, providing only £2,028 per year. When adding in the full State Pension (projected at £12,547 per year from 2026), employees would have a total annual retirement income of about £25,267, while the self-employed would only have £14,575. This equates to a £10,425 annual gap or roughly £208,500 over a 20-year retirement.
The main reasons for this widening gap are low participation, with only 20% of the self-employed contributing to a pension, compared to 88% of employees, and lower contribution levels. On average, the self-employed save £2,100 per year, while employees save £3,000.
To address this issue and help self-employed individuals invest in their future without sacrificing their present, Funding Circle offers small businesses a range of products that can help smooth out income fluctuations, invest strategically, and build financial resilience. Alexander Allen, the Managing Director & Chief Customer Officer at Funding Circle, said, “At Funding Circle, we work with thousands of self-employed people and small business owners who face this same balancing act – managing today’s cash flow while planning for tomorrow. Our mission has always been to help small businesses grow – but growth shouldn’t stop at your business. It should extend to your personal financial well-being, too.”
Derick is an experienced reporter having held multiple senior roles for large publishers across Europe. Specialist subjects include small business and financial emerging markets.