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By Edwina Langley
here are many perks to working as a freelancer: being your own boss; working the days you want to; and choosing your own clients. But there are disadvantages too – such as having to sort out your own pension.
“Self-employed people do not benefit from employer contributions to their pensions and they also are not auto-enrolled into a pension like those with an employer,” says Helen Morrissey, pension specialist at Royal London. “However, it is still important that self-employed individuals take steps to plan for their retirement.”
The reality is many self-employed workers currently do not have any plans in place. According to recent research conducted by auto-enrolment research unit Nest Insight, while 74% of self-employed people thought saving for retirement was important, only 24% were actually contributing to a pension. With more than four million people registered as self-employed in the UK, that means a large number of people are not making financial plans for later in life.
Long-term financial planning can be difficult when your workflow (and therefore cash flow) is unpredictable. It is common for freelancers not to know how much money they will make from one month to the next. Locking themselves into a financial commitment each month – when there are bills and rent or a mortgage to pay – can seem impractical, even unmanageable, regardless of how helpful it will be in later years.
“Based on my experience working with women, one of the biggest issues that comes up repeatedly is confusion about where and how to invest,” says Davinia Tomlinson, founder of rainchq.
“For freelance women who don’t have the luxury of a workplace pension scheme, sorting this out on top of the vast array of other tasks we have on our plates can be overwhelming.”
Nevertheless, it is important not to delay the process. Here’s how to get started.
‘Only 24% of self-employed workers are saving towards a pension.’
Know your options
Freelancers have a couple of choices to make when it comes to selecting a pension. Morrissey explains: “They can choose to contribute to a personal pension, a self-invested personal pension [Sipp], where they have access to a wider range of funds to invest in, or they may be able to contribute to Nest [the National Employment Savings Trust] – the provider set up by government to deal with auto-enrolment.”
Which option is best for you? Helen advises speaking to a financial adviser; someone who can “help you select the most appropriate pension for your needs, as well as offer advice on how much to contribute and how to invest”.
An adviser can also help you navigate pension rules and regulations. As Helen points out, in the last government budget, the lifetime allowance was frozen for five years. [You usually pay tax if your pension pots are worth more than the allowance of £1,073,100].
“Self-employed people should work with their financial adviser to ensure they are not in danger of breaching this allowance and potentially leave themselves open to a tax charge,” Morrissey says.
Think about how much you will need
A practical first step is to work out roughly how much money you think you will need after the age you plan to stop working and then work backwards to determine how much you need to save each month.
Chartered financial planner Samantha Secomb, founder of financial advice firm Women’s Wealth, says freelancers today tend not to stop working at a specific date – instead they reduce the amount of work they do gradually over time as they get older.
Pensions have adapted accordingly, allowing “flexible access to the pot to top up income”, or by enabling “a few one-off lump sum to cover extraordinary costs once your earning capacity begins to dwindle”.
While this is helpful, Secomb says it does make the task of deciphering how much of a pension pot you need “trickier to calculate”.
“Much will depend on what you have in other resources and the pattern of spending you forecast in retirement,” she says.
Pension calculators can help – she suggests this one from the Money Advice Service – but when making any kind of financial prediction years in advance, it is important to factor in inflation.
“If your household bills are currently £1,500 per month and you are considering your budget requirements in 28 years’ time, you should expect these bills to have doubled to £3,000 assuming inflation is 2.5% per year,” she says. “If your pension is invested appropriately, the effects of inflation can be reduced by good returns on the investment.”
Look for a flexible pension provider
If you go down the personal pension route, you will need a pension provider. There are three key things to be mindful of, says Tomlinson. First, look for a provider that offers “flexibility in the contributions you are able to make, so you can increase or decrease your contributions – notwithstanding any minimum threshold – subject to the ebbs and flows of your income level”, she says.
“You are saving for decades, so don’t beat yourself up should you find you are only able to contribute a smaller amount some months. As long as you are still able to contribute, do, and when you’re able to invest more, then make up the difference.”
Second, make sure the provider can enable you to easily claim tax relief on your contributions. Third, check that the provider offers “simple portfolio options that are adjusted for your risk tolerance as well as your personal values”. If ethical investing is a priority, for instance, make sure the provider has options to accommodate it, she adds.
Secomb’s advice echoes this.
“It is not the provider of the pension wrapper that is the most important factor – it is the investment option you chose within the wrapper. Make sure the wrapper you buy gives you access to investments that suit you and what you’re trying to achieve,” she says.
‘If you are of the mindset that you will never be able to save enough, stop that defeatist thinking.’
Mind the gender pension gap
Research by NOW: Pensions shows retired women have on average a 72% lower pension income than retired men.
“While women engage with workplace pensions as much as men early in their career, this changes if they take time out of the workplace to carry out caring responsibilities such as looking after children,” says Morrissey.
“When they return to the workplace, it’s often in part-time roles which are paid less, so they contribute less to their pensions as a result. Many women also opt out of pensions, so they can pay for childcare. All these factors conspire to ensure women enter retirement with lower pensions than men.”
It is a problem that has, unfortunately, only worsened in the past year.
“The Office for National Statistics (ONS) reported women consistently spent more time on unpaid childcare during the pandemic,” Samantha Gould, Head of PR and Campaigns at NOW: Pensions explains. “It is likely they reduced their working hours to cater for this, or stopped working altogether, both of which have a direct impact on pension savings.”
As part of a five-point plan of policy changes, NOW:Pensions is urging the government to address the availability and cost of childcare in respect of closing the gender pension gap.
Of course, it is not only mothers who are affected. All women are impacted by the gender pay gap, which has a knock-on effect on pension income.
“If your disposable income is lower than the average man, then it follows that your ability to eke out a regular pension contribution will be squeezed,” says Tomlinson.
While there is no quick fix to dismantling pay inequalities, she adds: “Research from Fidelity shows that an additional 1% in pension contributions could go a long way to closing the gender pension gap. So if you already have a pension, see how much more you can afford to contribute without putting yourself under undue pressure, and then notify your provider immediately.”
It’s never too late to start a pension
If you are of the mindset that you will never be able to save enough, stop that defeatist thinking. While it is beneficial to start saving for your pension as early as you can, even savings made later in your career can make a huge difference in retirement.
“Any money you put aside will make a contribution to improving your quality of life when you retire,” says Tomlinson. “The thing to remember is that your pension is perhaps one of the biggest investments you will ever make. Pension engagement levels are so low that many people are unaware their pension contributions are invested in the stock market as well as across other asset classes such as bonds.
“Research shows that stock-market investing has been proven to outperform cash saving over the long term, which is great news for our pensions, so it’s really important to take action as soon as you are able, to start compounding those gains over the long term and to benefit from the tax relief from the government.”
Comparing the start date of your pension contributions to other people’s is not a good idea, Tomlinson says, adding that the average state pension retirement age is “creeping up all the time” – so “while we are working longer than previous generations, this also gives us a longer runway to save and plan for the future. So stay calm, stay focused and act.”
If you are self-employed, don’t bury your head in the sand: look for a flexible pension plan where you can change your contributions from month to month.
By Edwina Langley