There are loads of great reasons to go freelance; flexibility, no boss to answer to and unlimited cups of tea. But when it comes to sorting out your pension, being self-employed can be have its downsides. For those of us used to employment, you can grow complacent to employer contributions and a regular income.
Few self-employed people are able or willing to think about their financial futures, with just 18% contributing to a pension, compared with 48% of employees. The reality is that the self-employed can’t expect to rely on a state pension, and should look into ways to save their pension. With that in mind, here’s some options to consider.
A personal pension is probably the most obvious for a freelancer, as you can make regular or individual lump sum payments. The amount you get when you retire depends on how much you paid in, how well the fund’s investments have done and how you decide to take money from your pension pot (as regular payments or lump sums). You can take up to 25% of the fund as a tax-free lump sum if you want to.
A type of personal pension, the stakeholder pension is where you pay money to a pension provider who in turn invests it, for example in shares. These pensions must meet government requirements, such as;
- management charges can’t be more than 1.5% of the fund’s value for the first 10 years and 1% after that
- you must be able to start and stop payments when you want or switch providers without being charged
- they have to meet certain security standards, for example have independent trustees and auditors
You can begin paying into a stakeholder pension from £20 per month. You can pay weekly or monthly. If you don’t want to make regular payments you can pay lump sums any time you want (great for freelancers with an irregular income).
Self-Invested Personal Pension (SIPP)
Another type of personal pension, the SIPP holds investments until you retire and start to draw a retirement income. The main difference between a SIPP and a regular personal pension is that with a SIPP, you have more flexibility with the investments you can choose.
Rather than allowing a pension provider to make investments on your behalf, you instead make them yourself. These types of pensions more suited to people experienced in investing, and with their higher charges than personal pensions, it is ideal for larger sums.
Executive Pension Plan (EPP)
The EPP is an option if you are a director of a limited company. It allows direct investment into shares or commercial property. With EPPs you control the retirement date, contribution levels and investment choice. This can make it a favourable option for any business savvy company director.
Another benefit is that you are able to provide valued staff with more generous benefits than other employees.
Mixture of Isas and pensions
Often a starting point for people saving for retirement, is keeping money in an Isa. There are pros and cons to this, the upside being that although Isa contributions are made out of your taxed income, all withdrawals are tax-free. This can be particularly useful in retirement if you want to boost your income without tipping into a higher tax bracket.
Isas are also very flexible as they can be accessed at any time, which makes them great for emergencies as well as long-term saving. However, an Isa doesn’t benefit from the same tax relief as a pension. And at 20 per cent tax relief for basic-rate taxpayers, this means the taxman pays in a further £25 for every £100 you pay in – a noteworthy amount of money.
Have you started saving for your pension? Are you considering one of the above options? Leave a comment below and let us know what you’re thinking of choosing!