Freelancer Pensions: Yes, You Need One (Here’s How)

When you’re bootstrapping your new freelance career, your retirement seems like a distant foggy vision of the future. It’s easy to let your retirement plans slide as you focus on the present – but it’s essential to take care of your future self, today. Here’s how.

Scary Freelance Pension Statistics

Before you start to feel guilty that you haven’t been saving enough for next year’s tax bill, let alone in-30-years’-time-you, hold up. 

When it comes to freelancers and the self-employed, we’re ALL guilty of leaving ourselves last. We’ll pay our rent, mortgage, utility bills, and other life essentials without a second thought. But our pension? Nah, that can wait, we say.

whopping 62% of us say that, actually. (Perhaps more worryingly, 28% of us don’t save for anything, at all, ever. We’re going to have words about that another time). 

The truth is, if you’re saving even a tiny amount each month right now, the wonders of compound interest will do the work for you.

Freelancers: You’re On Your Own

Another reason we leave pensions behind is simple: we’re not forced to do it, and there’s not the same incentive as our PAYE counterparts receive.

All businesses that employ even one member of staff must now auto-enrol them into a workplace pension scheme (if they’re eligible – which most workers are). Staff are automatically enrolled and have to pay a legal minimum of 5% pre-tax salary every month into their pension pot. Employers must also pay at least 3% contributions on top of that – and then the Government tops this up via tax relief, too (by 25% for basic rate taxpayers, tapered for higher and additional rate tax payers).

You can opt-out as an employee, but unless you’re desperate for the extra cash, it’s wise to remain opted-in so you can get the benefits.

As a freelancer, however, you don’t get these employer contributions. Worse, especially when you’re a sole trader, you get to see the money land in your bank account before you have to siphon it off into a pension pot. Employees never see their cash – but as a freelancer, you have to make that “taxes, pension, or ice cream?” choice every time an invoice is paid.

Assess Your Current Pension Situation

Before I get into the nitty-gritty, I want you to take a moment to find out if you already have a pension.

Many of us have hopped jobs over the years before taking the freelance leap. It’s likely you’ve got at least one workplace pension lurking somewhere. Use the Government’s Pension Tracing Service to locate your lost plans.

When you’ve got all the details, compare the fees for each plan – and any transfer charges. Weigh this up against the cost of transferring out into a cheaper stakeholder pension plan, like NEST, and if it makes sense to do so – make the switch.

Your Pension Options Explained (In Brief)

Look, I could talk for a week about your different pension options. Your best bet is to speak to an independent financial adviser: they can give you bespoke advice and help you grow your wealth as well as plan for your retirement.

Instead, here’s the super-fast rundown of your pension options – and after that, the number one pension plan every freelancer should start with.

Self-Invested Personal Pension (SIPP)

If you already dabble on the stock market, this could be an option for you. A SIPP lets you invest in stocks and shares, usually through an ISA to maximise tax efficiencies, to create a retirement wealth plan that suits you.

You can invest in all sorts of things – and would be wise to do so. Diversifying your portfolio is essential to reduce risk on your long-term wealth potential.

The fees for SIPPS are lower than managed funds, because you’re doing all the legwork.

However, if you don’t have significant savings, aren’t sure what a stock even is, or have no other retirement plan in place, this probably isn’t for you. It’s very hands-on, takes time, and leaves you open to the risk of losing your entire retirement fund.

Private Pension Plans

These are often the most common pension plans. You pay your money in and choose the level of risk you want to take.

Your money goes into a group pool for that defined level of risk. If you’re starting your pension early, at least 15 years from retirement, you can afford a higher level of risk. The closer you get to your retirement, the more stable you want your pension investment fund to be. Many providers will automatically move your plan type to a lower-risk one ten years before your set retirement date.

These group funds spread risk across markets. For example, the fund could invest in insurance markets, gold, energy, and other commodities. This means if one area takes a significant hit, but another improves, losses are mitigated and your wealth can grow steadily in the background.

As with any type of investing, your capital is at risk. You could get back less than you paid in.

Lifetime ISAs

This is an interesting one. Lifetime ISAs (LISAs) have taken over the Help to Buy ISA scheme. The big difference, however, is that you can use the savings account to either save for and fund a deposit for your first home – or save towards your retirement.

Available for those aged between 18 – 39 to open, you can pay in up to £4,000 per year. This is part of your annual £20,000 personal allowance for ISAs – so you can pay the remaining £16,000 into your equities, cash, and/or innovative finance ISAs, too.

When you buy your first home, you’ll be able to take this money and add a 25% bonus from the Government. Alternatively, you can keep paying into the account until you’re aged 50. 

The money then sits tight for ten years – yep, an entire decade – gathering interest, locked away from your clutches. When you turn 60, you can choose to take the money out – again, with a 25% Government bonus added on.

Now, a few things to say here: 

1. If you withdraw your money before you’re 60 and not to buy a house, you’ll lose the 25% bonus and face a minimum 6% withdrawal fee.

2. However, this does mean that, if you absolutely HAVE to, you could access these savings in times of dire need (unlike a pension).

3. If you’re not a homeowner yet, it’s a good way to plan for your future – you could use it for a house OR as part of your pension plan.

4. This should not be your sole pension option. You can only save £4,000 a year. 

5. You’re paying post-tax savings into the account, rather than pre-tax earnings. The 25% bonus, however, pretty much evens this out.

6. You can access a LISA when you’re 60 – several years before State Pension Age.

A LISA could be a nice extra tidy sum for your 60th birthday. In addition, unlike a pension, every penny in that account will be tax-free. So, if you want to withdraw a £100,000 lump sum (totally possible – that’s £4,000 x 20 years = £80,000, plus a £20,000 bonus), you absolutely can. A pension, however, will only allow the first 25% tax-free – the rest is paid at basic rate tax (usually).

(Psst: if you REALLY want to confuse things further, you can choose an equities LISA – that’s a LISA where you can invest your money in stocks and shares to try and get better returns. Main pension providers like AJ Bell and Nutmegoffer stocks and shares LISAs to help you try and grow your pension pot. Again, your capital is at risk if you choose this path – but the returns could be significantly better than the 1-2% interest on a cash LISA).

Set Up Your Stakeholder Pension Plan Today

Even if you don’t have a pension yet, set a basic one up now. You don’t need to have a fancy wealth management fund plan with massive charges that invests high-risk stocks and shares and all that gubbins.

Many investment options for your retirement, like SIPPS and equities ISAs, often require a set minimum contribution each month.

A stakeholder pension is the cheapest way to create a pension pot: the fees are capped, the investments are rated as low-risk, and you don’t have to make set contributions each month.

I repeat: you don’t have to meet set contribution minimums each month.

That means you can add money as and when you’ve got it to spare. As a self-employed contractor, that’s a beautiful sentence. In the months when all of your months-late invoices finally get paid, you can put loads in. In the lean months, you can stick in a fiver.

How to Save When You’re a Broke Freelancer

A wise woman and financial fountain of knowledge, Jasmine Birtles, said on the Royal London ‘The Penny Drops’ podcast that the first step to saving is simple:

Pay. Yourself. First.

Don’t wait until the end of the month when the money’s dried up and you’re already worrying about your next mortgage/rent/gym membership payments.

Set up automatic transfers at the start of the month, if you can. If that’s not possible – which, let’s face it, is probably the case for most of us – make sure you divvy up your payments as soon as you get them.

Many banks like Monzo and Halifax, and apps like Moneybox, allow you to set up ‘pots’. Have your invoices paid into a main account – and then it’s really easy to siphon off money straight away into different pots, such as:

  • Pension
  • Tax bill
  • Rent and utilities
  • Easy access savings
  • Fun money

Whenever you get an invoice paid, split it up. Put a set portion of every invoice into each of these pots – such as 25% tax, 5% pension, 30% rent, that kind of thing. Anything left over goes in the ‘fun money’ pot. That’s your ice cream fund.

Doing this – even if it’s a tiny invoice and you’ve transferred just a few quid into each pot – helps create the saving habit. It’s the first step to organising your finances – and preparing for your future.

Annie is not affiliated with any of the companies mentioned in this article. This article does not replace financial advice: before you make any big decisions about your finances, always speak to a qualified independent financial adviser. Your capital may be at risk with some investment types – including pensions. (You still need a pension, though).

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