While self-employment can come with lots of benefits, freelancers generally have less financial security than employees.
One area which this can be acutely felt is pensions.
While employed people must legally be enrolled into a workplace pension, those who don’t have the security of one full-time employer don’t have this luxury.
However, that doesn’t mean that there aren’t options available – it just means you need to do the hard work yourself.
Which – and we get it – can be hugely overwhelming.
‘While self-employed people benefit from the state pension the same as employed people, they don’t benefit from auto-enrolment into workplace pension schemes and must set up their own,’ says Lauren Harvey, assistant accounts manager at The Accountancy Partnership.
‘This is worth doing as it will ensure a secure future for you beyond being self-employed, and the government gives a tax benefit which, broadly speaking, gives back £25 for every £100 paid into a private pension to reflect the employer contributions that employed people get.’
It’s well worth doing, as for every £100 you invest into your pension, £125 will go into your pot, contributing to your future living fund.
And although, as a freelancer, you won’t get employer contributions, it’s not all doom and gloom.
Verena Hallam of Surviving to Saving. tells Metro.co.uk: ‘Self-employed people can contribute to pensions just as easily as someone who is employed, and there are lots of options.
‘In fact, you may actually have more freedom as lots of employers are only willing to pay into their chosen scheme.’
But where to start?
‘The first thing to consider if you’re self-employed is what type of pension you want,’ says Verena.
‘Do you want full control over exactly where your money is invested, or would you prefer to choose from a range of pre-made portfolios?
‘A self-invested personal pension (SIPP) allows you to make your own investment decisions, and choose from individual shares, funds, or bonds in much the same way as you would with a stocks and shares ISA. SIPP providers include Vanguard, AJ Bell or Hargreaves Lansdown.
‘Alternatively, you could choose a provider like PensionBee, Penfold, Nutmeg, or Wealthify, who all offer pre-made pension plans to choose from depending on your preferences and risk tolerance.’
Another option for self-employed workers is a NEST pension.
‘The National Employment Savings Trust (NEST) is a government-founded workplace pension scheme that self-employed workers are also eligible to join,’ explains Lauren
‘NEST allows self-employed people to contribute as little or as much as they want, but there are circumstances in which additional tax may be charged.’
As this is the pension provider of choice for a wide range of companies, there are benefits here if you’re in an industry that sees you change job or employer frequently.
‘Signing up to a NEST pension may bring an added bonus of keeping your pension in the same place as pensions from previous employers, if they used the same service,’ Lauren adds.
This means that, if you’re freelance and on a fixed term contract but still PAYE, you may qualify for auto-enrolment for short periods of time, then change roles – leaving you with lots of small pension pots. If you choose Nest, they will all end up in the same place.
Alternatively, in this situation, you can use a pension provider like PensionBee to consolidate your pensions into one place – although you’ll have to check for fees that this might incur.
‘The type of pension you choose will ultimately come down to personal preference and things like how interested you are in investing, or whether you want to spend more or less time making decisions,’ says Verena.
‘You can always change your mind in the future and transfer your pension pot to a different provider.
‘You can also choose to transfer your old workplace pensions into your new pension, which some people find easier to keep track of.
‘Whichever type of pension you choose, it’s worth comparing the fees each platform or provider charges as these can eat into your pension growth over time, so you want to keep fees as low as you can.’
Do I need to use a financial advisor?
There are so many pension options available, it can be hard to know where to start.
But is it worth paying someone for advice, or are you just as well to research the market on your own?
‘For someone starting from scratch with no previous pension savings, I would suggest looking at some of the well known platforms or apps,’ says Megan Jenkins, Partner at Saltus.
‘These are the perfect starting ground to get saving and have an array of risk rated funds to choose from at a low cost.’
She continues: ‘For someone who has accumulated pension savings from previous employment and has now gone freelance/self employed, I would suggest speaking to an adviser.
‘It may well be that someone has accumulated several pension pots at previous employers and having different pots can become an administrative headache.
‘Consolidating into one pension, either existing or new, could have many benefits but there are some things to look out for such as potentially losing preferential guarantees so it’s always prudent to take advice in this area.’
Additionally, she advises that if a person already has a pension then they may be able to make use of ‘carry forward’ and utilise unused allowances from previous tax years.
The tax benefits of having a pension
This leads us into the tax allowances of having a pension, which are well worth making the most of.
The rules state that you can contribute 100% of your salary, up to a maximum of £40,000 a year tax-free, and you’ll get tax relief on your personal contributions.
‘If you’re a basic rate taxpayer, your pension provider will claim 20% tax on your contributions and add this to your pension pot,’ explains Verena.
‘If you’re a higher or additional rate taxpayer, you can also claim extra tax relief on top of this through self-assessment.’
Types of pensions for freelancers or self-employed workers, according to EQ Investors.
‘Personal pensions offer funds for investors according to their needs and appetite for risk. The types of funds and charges can vary greatly between providers. It is worth checking if a provider offers the option to invest in sustainable funds and if they will charge a fee for transferring other pension pots in.
‘Self-invested pensions (SIPPs) usually offer a wider choice of investments and more flexible retirement options than a standard personal pension. However, it’s down to you to choose and manage the investments in your SIPP. This makes them most suited to people who are happy to make their own investment decisions or are willing to pay a financial adviser to help.
‘Stakeholder pensions are a type of defined contribution pension that comes with low and flexible minimum contributions and capped charges. It could suit if you are just starting to save for retirement and can’t afford larger payments or want to stop and start payments – which may be useful if you are self-employed.’
Consider consolidating your old pensions:
‘The average person holds 12 jobs in their lifetime, according to career expert Zippia, which means old pension plans can sometimes get forgotten. If you have old workplace or personal pensions, consider consolidating your pots into one plan that is in the right place for today’s investment market and easier for you to view and to manage.’
Source: Dale Scorer, Senior Financial Planner at EQ Investors.
She adds: ‘You then pay tax when you reach retirement age and start making withdrawals (although you can usually take up to 25% of the amount built up in any pension as a tax-free lump sum).
‘If you’re a sole trader, you’ll be making personal contributions, which come from the money you have withdrawn from your business and paid tax and national insurance on already.
‘If you’re operating as a limited company, things work a little bit differently, and you can make contributions directly from the company bank account as a business expense.
‘This then reduces your corporation tax liability. You also won’t have to pay national insurance on your contributions, which is another benefit.’
How much to contribute
Finally, the important question – how much should you be paying into a pension?
Of course, this will very much come down to how much you’re able to afford. And many pension providers allow small payments and pauses to contributions – making the thought of signing up less scary.
However, Pete Glancy, Head of Policy, Pensions & Investments at Scottish Widows, suggests that, ‘as a rule of thumb, you should try to save an average of 15% of your salary throughout your working life in order to enjoy a pension income of about two thirds of your working salary, if you are an average earner.’
He adds: ‘Although you tend to earn less when you are young, each pound that you save into a pension in your 20s will provide four times as much pension income as a pound that you save in your 50s, so starting early is important, even if it’s only a little at first.
‘We know that self-employed people have earnings which can fluctuate and so committing to a regular monthly savings amount of around £200 is often challenging, particularly in the current climate.’
Things to consider, after deciding which type of pension is best for you, according to EQ Investors.
1. Fund choice
Look at the types of funds you can invest in with different providers, whether they match the level of risk you are comfortable with, your investment goals and your ethical values.
This is an important one as charges will eat into your investment growth and reduce your retirement pot. Charges that come in under one per cent are competitive.
How much can you afford to pay into your pension, and how frequently will you contribute? Would you rather pay in lump sums when you can afford to (and does the scheme you are interested in offer this), or is a monthly direct debit more convenient?
Source: Dale Scorer, Senior Financial Planner at EQ Investors.
However, he explains that it’s possible to make lump sum contributions from time to time, as and when financial circumstances permit.
‘We also know that the self-employed can have unexpected cash calls to support their business throughout their working lives and some are concerned that saving money into a traditional pension means they can’t get access until at least the age of 55,’ Pete continues.
‘In general, the tax advantages of pensions are slightly greater than the tax advantages of a savings product such as an ISA – but using ISAs to save for retirement can also be great, if flexibility is something that is important to you.’
Pete adds one last piece of advice: ‘Beware of saving large amounts of money for the long term and holding it in cash, as inflation erodes the value of cash over time.
‘For example, if inflation was to run at 10% for the next two years, the £100 which you have today will only have buying power equivalent to £80 in 2 years’ time.’
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