Since 2018, all those working in full-time employment in the UK were automatically enrolled in a company pension with contributions from their employer. However, self-employed workers do not benefit from this legislation. With no mandatory pension scheme, no employer contributions and often an unstable income, it can be tricky for freelancers to put a pension pot in place. In fact, there are now over 5-million self-employed people in the UK yet 45% of self-employed workers aged between 35 and 55 have no private pension.
Here, we break down why a pension is so important and how to go about choosing the best plan for you.
Put simply, a pension is a pot of money you pay into throughout your working life which can be withdrawn when you retire or stop working. It works much like a savings account but one that is much trickier to withdraw money from.
With many of us living much longer, it’s crucial to have some savings in place for when you’re either unable or no longer want to work. “With people living well into their nineties, often you need to support yourself without work for thirty years or more. State provisions only provide a very basic retirement meaning that you need to be saving while working,” Matt Dean, a financial advisor and Managing Partner at Hoxton Capital, notes.
While all self-employed workers who have contributed National Insurance are entitled to the basic state pension, the amount is rarely enough to rely on. Currently, the full basic State Pension is £134.25 per week but there is no guarantee this will be in place when you reach retirement age.
For freelancers, it’s normal to have a variable income which means standard pensions where you contribute monthly don’t often work. “The freelancers we’ve spoken to have found that the pensions out there aren’t flexible or transparent enough,” Ryan Barnett, Economic Policy Advisor at IPSE explains. Furthermore, unlike those in full-time employment, freelancers can’t rely on their employer to make up some of the pension contributions.
It’s the million-dollar question but one that varies from person to person. Riina Trkulja, a chartered accountant, recommends contributing a percentage that is half of your age when you start contributing. “For example, if you start saving at 36, you should contribute 18 per cent of your income until you retire. For example, someone with £50,000 income could be contributing £9000 per year.” See this pension calculator to work out what you should be putting away.
Of course, the earlier the better ideally but there are some circumstances where it might be worth waiting. If you are investing in your business, you could hold off saving for the time being. “If larger income is expected in later years then you can make catch-up contributions when you are ready,” Trkulja said. Similarly, if you are paying off debts, it makes more financial sense to prioritise these first to avoid interest and fees.
Considering the lack of flexibility offered by many pension schemes – mainly the inability to draw out money without being penalised by fees – some freelancers may choose to save their money for retirement in a savings account like an ISA. While easy access to your money might mean you end up saving less, there are further benefits to saving money in a pension pot.
Most notably, tax relief. For lower rate taxpayers (that’s people earning under £50,000), it works out at 25 per cent. This means for every £100 you save you receive an additional £25 from the government in your pension pot.
There are three main types of pension available to the self-employed community: a personal pension, a stakeholder pension scheme and self-invested personal pensions. The key difference between the three is how much say you have in where the money is invested. With a personal pension and the stakeholder pension scheme you can’t choose where the money is invested, but with a self invested personal pension you can. Charges for depositing money into the pension pot and flexibility on withdrawing money vary between the three too.
The government’s pension scheme, called NEST, is one option for freelancers looking to invest in a personal pension. Technically it works a little differently to other pensions (it’s a trust not a bank or building society) but for the user it appears the same. The charges are relatively cheap (a 0.3% Annual Management Charge and a 1.8% charge per contribution) making a good option for those looking to start a simple no-frills pension quickly and easily.
There are three key things to look out for: fees, flexibility, and investment potential. Fees can be charged monthly and annually so it’s worth comparing what plans offer what percentage. Flexibility is particularly important for freelancers with fluctuating income, so choose a plan where you are not penalised for missing monthly payments or those that offer the ability to change when and how much you are saving. Finally, much like a normal savings account, a pension pot will grow over time in line with how the pension provider invests the money. It’s therefore worth looking at the past performance of the different pension providers you’re considering and comparing how they stack up.
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