As a freelancer, pensions might not be at the front of your mind, but with an aging population and an increasingly insecure economic outlook, you might want to think again.
With an aging population, funding pensions has been front and centre of the government’s agenda in recent years. The advent of auto enrolment represents their attempt to make sure as many workers have a pension scheme in place and start saving into it as soon as possible. Unfortunately, there’s nothing like this for freelancers. Indeed, according to recent data around a third of Britain’s freelancers have no provisions for retirement.
In part it’s understandable. As a freelancer, your entire attention is taken up with the here and now – often your thoughts extend only as far as ‘how am I going to pay the bills this week?’ Setting extra money aside for pension contributions sounds like a nice idea in principle – it just never gets to the top of your priority list. However, this is a classic case of things that are urgent crowding out things which are important. Saving into a pension scheme is a good idea for a number of reasons.
1. It protects you in your retirement: Many freelancers say they don’t plan to retire, but the choice may be taken out of your hands through your health. Relying on the state pension could make things incredibly tough in later life. Even if you do decide to keep on working this gives you an extra bit of income on which you may want to fall back on if needed. At the very least it gives you some choice – which given how little we all know about what life will be like when we hit retirement age is probably a good thing.
2. You get lots of tax relief: Many freelancers save into an ISA, but the tax relief and benefits you get from pensions can make this much more attractive in the long run. If you’re a sole trader, you’ll also get additional funds to top up your contributions.
3. You can claim it as expenses: You should be able to claim this as expenses to offset your income tax when it comes to self-assessment further bringing down your tax bill.
4. Saving is relatively easy: Yes, we know how tough things can be at the moment but saving a pension doesn’t necessarily mean putting away hundreds of pounds at a time. Even if you were to set aside just £5 per month over the course of ten years, you could build up a pot as high as £6,000.
5. The alternative is pretty grim: The current state pension is £168.60 per week. That’s not much, especially if you’re still having to pay rent or a mortgage. If you want to enjoy a decent retirement, you’ll have little choice other than to start saving now.
6. The market is diversifying: For years, the pension sector was a little tired and stale. However, it has moved with the times. The days in which pensions were geared to people who would spend 45 years chained to the same desk are over. They are more flexible and agile to mirror the way in which the world of work is changing. You can start a pension in one place of work and take it with you when you move elsewhere or go freelance. There are even a growing number of companies to choose from which offer services especially tailored to the self-employed.
7. There is lots of support out there: As a freelancer, you’ll be accustomed to the idea of outsourcing – indeed it’s what your entire business model is all about. You may already be getting financial advice for doing your tax and managing other aspects of your personal finance, so why not do the same for pensions? This will be an important decision, so it’s one you might want to take up.
8. It could be an excuse to up your day rates: One of the tricky things for freelancers is that it can feel hard to put your day rates up. Many who have been at this game for a long time, haven’t changed their rates for years. At a time when inflation is going up faster than any time for decades it might be time to change that. If you’re making pension contributions, your monthly expenditure will be going up. You could feel justified in passing some of those costs onto your clients.
Choosing your pension
So, that’s the why of this question sorted out. The next, and arguably more important bit, is the how. The first thing to remember is that this is something you should do as early as possible. The sooner you start the sooner you’ll have saved a decent amount by the time you come to retire.
However, that might not be possible for everyone so if you’re in your 40s, 50s or even 60s, let’s just celebrate that you made it to the party even if you’re a little late. The point to remember is it’s never too late to start saving.
However, your choice of pensions may depend on what your goals are. The basic personal pensions involve passing your money over to a pension advisor who will manage the fund for you. These are relatively cheap with most providers offering a range of pension plans.
These days, these include ethical pensions which only invest in certain assets which meet the values of their customers. In these cases, the contents of the portfolio will be just as important to you as how much it’s returning. You should make sure you understand what the fund will invest in and what it will not to make sure it complies with your values.
For people who like a bit more control there are self-invested personal pensions (SIIPs). These have grown in popularity in recent times and allow you to adjust your portfolio in real time. This helps you be more agile and respond to changeable markets. However, they can come with slightly higher fees and may not be the best choice for everyone – especially those with limited interest in financial markets.
One thing, though, is certain. For all the volatility of financial markets and for all the short-term struggles people are experiencing, having a pension is vital. With people expecting to live for much longer after they retire, those who don’t have savings, or a pension could find themselves having to work much harder for longer and enjoying a much less comfortable quality of life.
