Nobody wants to talk about pensions. It feels like one of those concerns that I should have left behind in the world of the 9-5 office job; something for my employer to fuss about and for me to accept is happening.
Unfortunately, freelancers should address the issue of pensions sooner rather than later. Every month or year you spend without saving is less money you might have in the future – and who knows if we can rely on a State Pension in 30 or 40 years?
If you haven’t started saving for a pension, you’re not alone. Between 2016 and 2017, only 14% of self-employed people were putting money into a pension pot. However, there’s never a bad time to start thinking about it, even if you’re just a few months into full-time freelancing.
If you are starting to think about your pension, there are lots of things to consider. How much should you save? Where should your money go? How should you invest it?
To help you with the daunting subject of freelancer pensions, we’ve put together this guide to the entire process.
Why should you open a pension pot?
Of course, the more cynical freelancers out there might argue: why am I saving money I won’t see for 40 years when the world will probably be an apocalyptic hellscape by then?
Even if this is the case (and my anxiety-ridden mind is praying it won’t be), it’s still important to save. If it’s more palatable, think of your pension as a long-term savings account.
Pensions are arguably even more important for freelancers than full-time workers. Employers are required to top up their workers’ pension pots by a minimum of 3% (though some companies in the private sector could pay up to 10%), substantially raising the amount you save each month.
Granted, the government does help out self-employed people with their pensions by offering 20% tax relief on any savings up to £40,000 a year. For example, for every £100 you place into your pensions pot, the government will give you an additional £25.
However, as you’ve already paid tax on those earnings, you should view this as a nice extra – it’s not on the same level as standard employer contributions. Freelancers still have to cough up 100% of their pension themselves, so you’ll benefit from thinking about it early.
Calculating monthly savings
If you’ve decided to get started with putting some money away, your next question will be, “how much should I put away?”
Unfortunately, there’s no easy answer. Every finance guru will have a different suggestion, but it all comes down to how much you‘re currently earning and how much you’d feel comfortable putting away. Remember, unlike a regular savings account, you can’t touch this money for a very long time.
A basic rule of thumb is that whatever age you are, save half of that. If you’re 20, save 10%; if you’re 30, save 15%.
A variation on that: take the age that you started saving for a pension (hopefully whatever age you are now if you’ve read this article!), halve it, and save that amount every month. However, this does mean your pension contributions won’t increase if or when your income does.
Whichever calculation you use, the average pension savings for freelancers in their 20s and 30s will come to around 10%-20% of your earnings per month.
There are also pension calculators out there that will give you an idea of how much you might have when you hit retirement. The issue with calculators is that you’ll need to know how much you want to live off at that age, which can be difficult.
One survey of pensioners found that a retired couple required on average £26,000 per year to sustain their lifestyle, including holidays and leisure activities, as well as household bills. Nobody knows what the cost of living could look like in 45 years, but it wouldn’t hurt to base your calculations around this sum.
In the end, though, it doesn’t matter if you’re following a standard pension calculation or not. The only important thing is that you’re putting something away every month, no matter if that’s £50 or £150.
Pension providers for freelancers
If you’ve ever worked full-time for a company, chances are you already have a pension pot waiting for you. In two years of full-time work, I had a little over £2,000 sat in two separate pension pots – not much, but enough to get me started.
Your first step will be to combine your separate pension pots into one. Again, there’s no hard and fast rule for which company you choose to hold your pension.
If you have multiple pensions, you might choose to keep one of them open and transfer the others into it. If you don’t have any pension pots right now – for example, if you’ve always been self-employed – then you’ll have to begin your research anew.
There are plenty of companies out there that specialise in self-employed and freelancer pensions, including PensionBee and Penfold; you can also open a private pension pot with most other pension providers.
When you’re choosing a pension provider, there are three things to keep in mind: fees, flexibility, and investment choices. Most pension providers will charge an annual fee for their service, and as a freelancer, you might also want an account that allows you to put in funds at your own pace.
Your pension funds will be invested in various schemes, likely through third-party money managers and private investors. On a standard plan, your money will go into well-performing global shares and bonds, so you should see your pension pot increase year after year.
However, there are different options regarding your investments. Some pension providers will have a plan that includes riskier investments when you’re young and safer ones as you get older, or you might throw caution to the wind and choose a high-risk plan with the opportunity for more gains.
Some companies specialise in fossil-fuel-free plans or ones where your money goes towards green investments. These are usually slightly riskier but are a great option if you want your money to go towards helping the planet.