5 Steps To Starting A Pension If You're A Freelancer
Being self-employed comes with a great many perks, but one of the most annoying things about being your own boss is having no automatic way to save for your retirement. (That, and all the expenses receipts.) But, as we all know, the longer you leave it, the more difficult it gets. So here's the lowdown on starting a pension as a freelancer.
According to the Money Advice Service, almost five million people in the UK are currently self-employed, yet only 31% of them are putting money into a pension. To put it nicely, that's a bit of an issue.
Although paying national insurance contributions means you're entitled to the State Pension, the amount you'll receive is pretty paltry (for the tax year 2019-2020, the figure stands at £168.60 per week). So this means that, unfortunately, you're going to want to start thinking about other ways you can save towards a pension of your own. Thankfully, Damien Fogg, founder of The EP Investor, says it can be done in a few easy steps. "For most people, the rule of ‘keep it simple’ is the best way to go," he adds.
And trust me, breaking it down like this makes everything seem much less daunting:
1. Know what a pension is
This doesn't just mean knowing the basic definition of a pension (though that will evidently come in handy). It's more about knowing what it means for you personally. "A pension plan is simply the name of a savings account that you can put money into," explains Fogg.
However, the point of a pension is to increase the amount of money you have saved so that you have a nice full pot by the time you come to retire. This is done by investing the money into various stocks and shares. Investment options can range from shares in specific companies to government bonds, they can be low-risk or high-risk, and can be chosen by you or picked for you by a pension plan provider.
"Unlike most other savings accounts, you will get tax relief on any contributions you pay into [a pension plan]," Fogg states. Unfortunately, there's not one rule for everyone. This is the complicated world of finance we're talking about after all. But it's not as complex as it seems. Ultimately, the tax bracket you fall into defines how much the government will add to your pension with the tax you've already paid.
For example, if you want to add £100 a month to your pension pot, basic rate taxpayers would have to pay in £80, and they would receive a £20 government contribution. Higher rate taxpayers would pay in £60 to get £40, and top rate taxpayers would pay in just £55 for a government pay-in of £45.
There are some rules and regulations, namely that you're only allowed tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, depending on which is lower.
2. Decide on a pension plan
Each pension plan can come with different fees and fund options. "The fund selection you have is important because that limits where you can invest your money and what likely returns you’ll make over the next few decades," notes Fogg.
As a freelancer, there are three main types of pensions you need to know about:
- Ordinary personal pensions (also known as a private pension) are managed for you by investment companies.
- Self-invested pension plans (SIPPs) are ones that you manage yourself, so you control where your money is going.
- Stakeholder pensions can be good for those who need flexibility as maximum annual fees are capped at 1.5% and you can stop and start payments without receiving a penalty.
You also have a couple of alternative options. The National Employment Savings Trust (NEST) is a government pension scheme you can join if you're self-employed or the sole director of a company with no other employees.
Or basic rate taxpayers may want to look into the Lifetime ISA, says personal finance blogger Jenni Hill from Can't Swing A Cat. "You can put up to £4,000 a year and the government will top up your contributions by 25% when you come to either buy a home or retire," she says, adding: "The Lifetime ISA is more flexible than a pension in that if you really wish to, you can withdraw your own contributions early and spend it on anything you like, though there are a few additional things to consider." Mainly that pre-retirement withdrawals or ones that don't involve buying a home will result in a 25% charge.
3. Know your percentages
"Most work pension schemes invest in the stock markets around the world, which historically have given a return of 7% [or more]," says Fogg. Therefore, he advises aiming for a similar percentage for your personal pension return.
"There are literally thousands of funds to choose from but don’t let that intimidate you or put you off," he adds. Instead, you can go down the simple route by utilising a fund manager that offers "funds that split your money across some high-risk investments and some low-risk investments."
Whatever you do, it's advisable you don't just leave your money in a low-interest savings account or forget to enlist the help of a financial advisor for personalised advice.
4. Fund the pension
You have two options for actually adding money to your pension pot. One: transferring a lump sum. Or two: putting in a certain amount each month. "The stuffy old man’s guide to this is take your age when you start investing and divide it by two. That’s the percentage of your salary you should then invest each month," says Fogg.
But, he says, just put in what you can afford. If you do have some sort of regular income, it's a good idea "to set up the standing order so it goes out the same day you're paid," he says. That way, you won't even notice the money's gone. And if your monthly earnings go up, don't forget to increase the contribution amount.
5. Look Ahead
Starting the pension process is often the hardest part. But once you know where your money is going and how much you're contributing each month, you can start to really plan for the future.
The last step is knowing exactly how much money you'll need when you retire. Plenty of pension calculators exist to help you work this out in a matter of minutes.
As time goes on, you may want to change where you invest your pension fund, notes Fogg. "And the closer you get to retirement, you [may] want to reduce the risk of major losses in your investments." But again, a financial advisor is always there to help.