As a freelancer, saving for retirement is completely down to you. This is in stark contrast to the situation of employees, who are encouraged to contribute to a pension through ‘automatic enrolment’, a system which also includes the legal requirement for the employer to contribute.
In fact, many freelancers are in the dark about what to do about their pensions. Recent research from the investment company Fidelity found that 62% of self-employed people currently have no form of pension savings and 28% aren’t saving for anything at all.
"If you’re a self-employed freelancer you won’t be enrolled in a workplace pension scheme which means you’ll miss out on what’s effectively ’free money’ from your employer," PensionBee CEO, Romi Savova says.
"It’s really important to set up your own pension and start saving to ensure you’ll have enough money put aside for a happy retirement."
Pension options for freelancers
The good news is that freelancers have a number of options when it comes to deciding what to do about their pensions, giving savers the freedom to choose the best option for their circumstances.
An ordinary personal pension, also known as a private pension, is the most common choice and something that’s offered by most providers, including PensionBee, which is available through Starling’s Marketplace. You pay into these plans and they are managed for you by big investment companies such as State Street Global Advisors and BlackRock.
Another option is a self-invested personal pension, or SIPP, that you manage yourself. It’s similar to a private pension, except you have the flexibility to choose which funds to invest in. SIPPS are suited for people comfortable managing their own investments as you can choose from a wide range of assets to invest in, from stocks and shares to commercial property and trusts. Wealthsimple, a Starling Marketplace partner, offers this option.
A stakeholder pension is something self-employed savers might also be interested in for their flexibility. There’s a low minimum gross contribution of £20 and fees are capped at 1.5% a year, for the first 10 years. This option allows you to save flexibly, and you can stop and start your payments without incurring a penalty.
Another option is the NEST (National Employment Savings Trust) government scheme. It was primarily created for automatic enrolment in order for companies to be able to offer pensions to employees, however, freelancers can also use it. You can join if you’re self-employed or the sole director of a company that doesn’t employ anyone else. To see if you’re eligible, check NEST’s website.
Reap the tax relief
“Making pension contributions while you’re working can be more attractive than investing into an ISA because of the benefits of tax relief,” Tom Francis, investment adviser, at Wealthsimple, said. “The key to pensions is to try and gain as much tax relief as possible through contributions, and pay as little tax as possible on withdrawals.”
If you’re a sole trader paying the basic tax rate, you’ll usually get a 25% tax top-up from the government. So if you paid £100 into your pension from a personal bank account, HMRC would effectively add another £25 in tax relief. Higher rate taxpayers can claim a further 20% and top-rate taxpayers can claim an additional 25%.
If you make contributions through your limited company, saving into a pension can bring significant tax advantages. That’s because pension contributions can be treated as an allowable business expense and offset against a company’s corporation tax bill.
Start small, but start soon
When thinking about pensions as a freelancer, it’s important to take into account that your income is likely to fluctuate quite a lot. A good strategy is starting with a small, manageable amount that you regularly pay into a pension by direct debit.
Tom from Wealthsimple advises freelancers to also watch out for fees. “What might seem like a small fee now is going to be compounded over time and could cost you thousands of your hard-earned savings at retirement,” he says. “A good rule of thumb is you should never be paying more than 1% in what you are investing in fees.”
The sooner you start a pension and get into the habit of saving the better, as the power of compound interest could have a significant impact on your savings. “Compound interest is the interest that you earn on your pension’s interest, and can help turn a small savings pot into a significant amount when left untouched,” Romi from PensionBee says. “Which is why Albert Einstein reportedly called it the eighth wonder of the world!"