There are over five million self-employed people in the UK (Source: ONS). While there are a huge number of benefits to working for yourself, there are also a few drawbacks too, especially where pensions are concerned.
In the UK, employers are required to contribute to the pensions of their employees. Some even offer enhanced contributions as a perk. Over the course of the average working life, this can be a significant amount added to your pension pot.
Setting aside money for things like tax, National Insurance and pensions can be a difficult habit to get into.
So, as a freelancer, how do you choose a pension scheme and how can you make savings in your budget to build up your pension pot.
Develop A Healthy Relationship With Money
Being completely responsible for your own financial future can be a bit daunting. If you’ve little experience with managing your own money and planning for the future, it’s easy to stick your head in the sand or spend everything you have coming in. Retirement can seem so far away. The earlier you start building up your pension pot, the more comfortable your retirement will be.
Get used to setting budgets and keeping control of your costs. Be strict about your spending habits and look to sites like Net Voucher Codes to get money off purchases you need to make.
Develop good habits such as not automatically letting all of your contracts and insurance renew without first doing price comparisons.
Get A Business Bank Account That Makes Life Easier
Having a separate bank account for your freelancing income is a good idea. It keeps everything from getting muddled up and is a lot easier when it comes time to file your tax return.
There are many smart bank accounts now that you can run totally online and they have a range of great features that can help you save. You can set your account to split the money you have coming in and direct it to a range of pots. This is especially good for saving up for tax or regular business expenses. It is done as soon as the money enters your account so you can’t accidentally spend it or forget to transfer it somewhere else to save it.
If you’re in the UK, accounts from Starling, Coconut and Monzo are very popular with freelancers looking for a lot of features for a low cost.
Choosing The Right Pension
Up until recently, if you were self-employed, you were left to your own devices when it came to arranging your pension. You weren’t allowed to access the same pension products as companies, so most freelancers simply opened a private pension and used that to make their contributions.
Luckily, the market has come a long way since then, with pensions being much easier to access and contribute to, with freelancers in mind. You can pause or alter your payments if you’re income is inconsistent and combine all of your old pension pots in easy to one so that you aren’t tracking multiple pensions with only a little money in them.
Knowing How Much You Need To Save
Although retirement is decades away, you need to have an idea of how much you need to save to have the kind of retirement you want. Are you planning to work until state retirement age, or do you want to retire at 50 and spend your time doing the things you’ve always wanted to? There will be a state pension available to you too but this isn’t a great deal of money and may not want to have to rely on it to completely support you. Currently, the state pension is £179 per week. The level of pension and the age you will be able to draw might be different for you at retirement than it is now.
There are a lot of good pension calculators online that will give you an indication of how much you need to be saving every month for retirement.
If you’re paying the basic rate of tax, the government will pay £25 into your pension for every £100 you do.
If you’re a higher rate taxpayer, you can claim another £25 on your tax return for every £100 you pay in.
How Much Can You Save?
There’s nothing stopping you from putting as much into your pension pot as you want to. However, anything over £40,000 and you won’t be able to get any tax relief. You can rollover any unused amounts from this £40,000 for a maximum of three years.
Talk To A Financial Adviser
There are many misconceptions around financial advisers. You don’t need to be rich to put their advice into action. They can work with you to find the best ways to meet your financial goals as you go through life as well as help you plan for having a family, property investment and estate planning.
Review Your Plans Regularly
Starting to save early and regularly is a great way to go, but you also need to take stock of your situation regularly.
As time goes on, you might find that you have different levels of income, or there have been changes to tax relief of government contributions. It’s anyone’s guess what the state pension level will be in the future. Any of these changes may mean you have to save more or adjust your retirement plans. So check back in on an annual basis at least.
Even though there are over 5 million freelancers in the UK, 31% of them are not saving anything towards their pensions. When you’re in your 20s, it’s easy to put off saving and think I’ll start saving next year. But then something always comes up and before you know it, you’re panicking about having enough money to retire on.
By getting your finances in line early and having a clear idea of how much you’ll need to save, then you can take some of the fear out of pensions and retirement.