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The Freelancer Pension Problem

Posted by Warr Co in Financial advice, Personal Accountancy, Self Employed Advice | 0 comments

October 2017 was the deadline for all small businesses to provide a pension scheme for employees via auto enrolment, with 3 months in which to comply, all small business employees should now have a shiny new pension plan in their pockets! However… this does not apply to freelancers and most contractors.

Image of a freelancer calculating their retirement savings and a piggy bank

It’s a brilliant and long-overdue initiative, pensions are really important and they’re finally getting the government push they need. Our population is living longer on average – which is good, but inflation is rising faster than wages – which is bad!

A pension gives you a little extra security, and there is no time that should be considered ‘too soon’ to start a pension. So if you’re 22 in your first job you get a pension, and if you’re 40 and never had a pension before you get one too, but you may have to save a little more aggressively!

 

The problem is, that if you work for yourself, you don’t necessarily have to comply with auto enrolment. If you are a sole trader or a limited company of one, ie: a typical contractor, then you don’t have to set up pensions as part of auto enrolment.

And currently in the UK, 75% of the 5 million self employed freelancers and contractors do not have a pension scheme they’re paying in to. Our advice is, don’t rely on the State Pension to bail you out in the future, unless you think you’ll be happy to live on the future (insert your retirement year here) equivalent of £159.55 per week!

 

The Taylor Review in 2017 called for an auto enrolment type scheme to be put in place for self employed workers, but there’s no news so far from the Government. We feel it’s likely that something will be put in place over the next few years.

So, as a rule of thumb you want to be putting away about 15% of your salary to save for your retirement, but any amount is better than nothing. So even if you can only put away £100 a month at the moment, get it done, starting something new like this is always the hardest part.
 

So what to do…

  • Re-evaluate your rates. Freelancers have a habit of under-charging for their skills. Your hourly/daily/weekly rate should reflect your skill level, how in-demand those skills are, your equivalent benefits (sick pay, holiday pay, training, NI contributions, accountant’s fees and more* – think benefits that an employee might receive) and your pension contributions. You’ll have to do a few calculations to make sure your numbers are right, work out how much you’d like in the bank for retirement, when you’ll retire and figure out what that means in terms of your hourly rate. And for contractors, make sure that the rates you’re willing to work for make long-term financial sense, take a look at the ‘Work Out Your Rate’ section of this blog which allows for being ‘out of contract’.
  • Pick a pension type. Believe it or not, there’s not a one-solution-fits-all here, and you’ll have to decide which type of pension will work best for you. Your current age, savings, earnings and what each pension provider can offer you will come into play when deciding upon a pension scheme – remember, you can always transfer your pension for a fee at a later date you find a scheme you prefer.
  • Consider other investments. There are other ways to invest your money which could be prove to be beneficial in the future. These include; isas, stocks, investing in business opportunities, and purchasing property or expensive items which will hold their value. All of these options are higher-risk than setting up a typical pension scheme.
  • Take out a business insurance policy. This needs to come into the ‘more’ mentioned in step 1 above. The majority of self employed workers have no business or income insurance in place, so in the event of long-term sick leave, for example, your savings could take a huge hit. Protect your day-to-day earnings and your pension savings by taking out a business insurance policy.

 

The Pension/Dividend Trade-off

If you work for your own Limited Company, this might be of particular interest to you, especially in light of the 2018/19 reduction in dividend allowance (link to dividend blog), you should consider paying into your pension over paying into your bank account.

If you can afford not to draw your max dividends, you’ll find there are significant tax efficiencies in putting your dividend payments straight into your retirement savings pot. For example, you could be paying 20% corporation tax and then 25% personal income tax on your dividend payment, or you could take that same payment and put 100% of it into your pension – no tax!

 

For Warr & Co clients, if you’d like to discuss any of the points raised in this blog, or ask our advice please feel free to call us or email your accountant to discuss your pension and savings options. If you’re not currently a client but would be interested in becoming one, call or email to arrange a free no-obligation consultation.

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