Often, we only tend to look at the immediate effects of our decisions. Going freelance, for example, strips away the need to answer to a boss, or head downcast into an office every morning – a fantastic reality, you may think.
Yet there are compromises to bear, and one of them is the loss of a company pension scheme. Remarkably, an FSB survey tells us that 69% of self-employed people in the UK aren’t saving for their pension, even though no-one else can do it for them.
So, to get you in the right, considerate mindset, we’re listing four tips for a personal pension plan…
1. Start paying a modest sum early
This is the most vital chunk of advice: begin saving now, even if you’re fairly new to the freelancing/contracting game! The government grants tax relief to any pension contributions below £40,000 a year, which – unless you’re a professional unicorn – we’re guessing you won’t exceed.
It’s based on a quarter of your payments. Pay £100 a month, for instance, and it’ll be topped up with £25, making for a tidy sum after several decades go by.
If you operate from your own Limited company (and your the sole employee/director), then rather than operating a pension via auto-enrolment you can pay directly into a SIPP, although you won’t get the top up mentioned above your company will receive corporation tax relief on the payments.
2. Consider a Lifetime ISA instead
If your earnings are fairly modest – say, anything between £20,000-£30,000 – then the Lifetime ISA may be for you. Introduced in the 2017 tax year, it’s a government-backed scheme that grants (again) 25% tax reclamation on anything you put into the pot.
The difference is that, unlike the vast majority of personal pensions, any withdrawals are tax free when they occur. There’s a limit of £4,000 per annum in payments – if you start from the age of 25, hypothetically, and choose to withdraw in 30 years’ time, then that’ll be a £30k bonus in addition to £120,000 (30 x £4,000).
3. For more control, invest in SIPPs
Ever heard of these trusts? A SIPP (Self-Invested Personal Pension) grants you a lot more control over where your money goes, and how it increases. Providers can pump your contributions into an endowment policy, stocks and shares, or the property market, as well as several other routes to a bigger sum.
However, be aware that these plans carry plenty of risk; the pension could be diminished with a poor investment, just as it could grow if you hit a home run. The set-up costs are usually higher too, and the greater array of options they lend, the more expensive the provider will be.
4. Get stakeholder status if you’re income is irregular
Contractors and freelancers rarely know what they’re bringing in each month, never mind what they can set aside for a pension pot. Some of you will have dicier income streams than others – if this is the case, explore stakeholder pensions, which have very low charges if you keep changing your payments.
The minimum is just £20, with no penalty fee if you decide to stop for a while. In terms of a downside, you have almost no decisions in how that cash is invested: it’s a low-risk, flexible solution that can be very appealing.
We aren’t at the end of our self-employed pension discussion, by any means! Contact Bright Ideas on 0161 451 3941 or email info@biaccountancy.com for firm, specialist financial assistance, so you’re ready to pluck the fruits of your labour when they’re due…
