Growing old might be one of the last things on your mind, but with just 25% of the 4.8 million UK freelancers actively paying into a pension, most aren’t thinking about how they’ll provide for themselves in retirement.
In this chapter, we’ll explore:
a) why now is the best time to plan for your retirement
and
b) how to plan for your future income
We’ll explain the state pension, look at the options available to freelancers and what alternatives there are.
What is the state pension?
The state pension is a regular payment from the government for people of pensionable age (from 2019 this will be 66) that ensures everyone has some income when they retire. The payments are funded by the National Insurance contributions (NICs) you pay while you’re working.
Do freelancers qualify for the state pension?
Yes. Self-employed people have the same right to a state pension as employees. The amount you receive depends on the number of years you’ve paid your NICs.
If you’ve already registered for self-assessment, you can check what pension contributions you’ve made at gov.uk using the same login details.
To get the full amount, you’ll have to have paid in 30 years worth of contributions.
But the state pension is meant just as a foundation for your income. The maximum you can get is £164.35 a week, so it’s important to put a plan in place to supplement this.
Choose a pension option
There are five different pension options for freelancers:
Workplace pension
Personal pension
Stakeholder
Self-invested (SIPPS)
National Employment Savings Trust (NEST)
1. Workplace pension
If you’re coming to self-employment having left a permanent job, it may be possible to continue paying into your work-based pension (check with your provider).
Without your employer’s contribution to top this up, there’ll be less paid in, but you can increase your contributions when you earn more.
2. Personal pension
You can set up a private personal pension through an insurance or investment company. The money you contribute will be invested on your behalf into stocks, shares or other assets with the hope that the money you’ve invested will grow.
Personal pensions offer a larger number of investment funds to invest your money in, and are usually a little more expensive than the next option on the list.
3. Stakeholder pension
Contributions made to stakeholder pensions are more flexible, which means you don’t have to pay in monthly. Management charges are usually lower than personal pensions, but there is less choice in terms of investment funds.
You also pay no penalty if you want to transfer the pension to another provider.
4. Self-invested (SIPPs)
Self-invested personal pensions are the most expensive of the offerings. If you want to take an active part in deciding how your contributions are invested, then this is a good option.
It means that you get to choose the stocks/shares etc that go into your pension.
5. NEST (National Employment Savings Trust)
This is the agency that runs the government’s work-based pension scheme. It isn’t typically for self-employed people, but you may qualify (check online). However, NEST offers fairly basic investment choices.
The earlier you start saving, the better. According to the table below from the Money Helper, investing £100 a month from age 30 will mean £76,000 more in your pension pot than if you start at 50 with the same monthly contribution:
Start saving at age | You pay | Govt pays | Pension pot at age 68* |
30 | £100 | £25 | £112,000 |
40 | £100 | £25 | £68,000 |
50 | £100 | £25 | £36,000 |
Is there a maximum amount I can pay in each year?
No. You can pay in as much as you like each year. However, the maximum amount you can get tax relief on is £60,000*. This is called your annual allowance, meaning anything paid above this amount won't benefit from the government’s tax relief.
Identify the alternatives
Your business itself could add to your pension pot. The more successful you make it, the more attractive it’ll be to potential buyers. Sell before you retire and use the money to fund your retirement.
Using the extra money to pay off your mortgage and your home is another alternative. Once the mortgage is paid you can sell up, downsize and use the profit as a retirement income. Or you could use this money to invest in a buy-to-let property and use the rent as income.
Invest in an individual savings account (ISA), and you’ll benefit from a flexible tax-free scheme. There are limits on how much you can put in some, and you may need to give notice when you want to withdraw.
Let's recap!
Explore your pension choices.
Identify the alternatives to pension plans.
In part one we explored the process you’ll go through to set up as a freelancer, including how to choose a business name, register as self-employed and find work. Part two focused on how you’ll protect yourself and your business, looking at your insurance options, how to finance your business and plan for your pension. In part three, you’ll examine the most important document you’ll need to write – your business plan.
