Life as a self-employed professional can be exciting and enriching. It’s your opportunity to branch out alone and do what you do best. You’re your own boss. What’s better than being able to set your own working hours? Sure, having no one above you to report to is a massive bonus, but one aspect that many self-employed people forget to consider is saving for their futures.
Self-employed professionals have plenty to juggle day-to-day. They have business expenses to cover, whilst ensuring they have enough cash flow to grow and serve their customers’ expectations. If you’re self-employed, it’s understandable that retirement may not be at the forefront of your mind. A recent survey by the National Employment Savings Trust (Nest) revealed that less than a quarter (24%) of self-employed individuals are actively saving into a pension.
Nevertheless, money management for the future doesn’t have to be time-consuming or complex. By implementing a savings plan you can secure a great retirement and put you in even greater control of your own time.
Define a pension and retirement goal
First and foremost, you need to have a rough time in mind when you’d like to retire from the day job and enjoy the good life. Most people’s government pensions will not be triggered until the age of 68, but that doesn’t mean you can’t begin a pension plan with a goal to retire aged 60. It ultimately depends on the type of lifestyle you want when you’ve retired. There are calculators and planners available online that can help you set a long-term savings target in mind. Although it might seem a daunting figure from the outset, once you break that up into monthly contributions over several decades, it’s absolutely achievable.
Explore the different types of self-employed pensions available
Having a private pension to top up your income, as well as your state pension, can help give you breathing space as you get older. In the UK, there are three types of pension plans you should consider as a self-employed professional:
Personal pensions have long been the way to go for self-employed professionals without the time to spend pouring over investment decisions themselves. Think of it as a default pension plan, with these products tending to a set number of broad-based funds that build your pension pot slowly over time. However, more adventurous funds are available for those prepared to be more aggressive with their savings. When you set up a personal pension plan, your number-one mission is to decide how much you want to save into it monthly, then away you go.
Self-Invested Personal Pensions
Self-invested personal pensions (SIPPs) are an increasingly popular personal pension product in the UK. Like a personal pension, with a SIPP you decide how much to put in your pension and when, so it can be flexible if your income fluctuates. The key difference is that with a SIPP, you make the investment decisions. Think of it as a “DIY” alternative to a conventional pension plan, where only a handful of funds are offered based on your appetite for risk. SIPP account holders can create their own portfolio of shares or invest in ready-made basket of stocks through ETFs and investment trusts. SIPP investors can access even the most expensive US equities, thanks to fractional shares, which allow you to invest in a small slice of the most valuable stocks to diversify your overall portfolio. As with other personal pensions, basic rate tax relief on all SIPP contributions is immediate and deposited directly into your SIPP account from your SIPP provider and HMRC. This is useful as your boosted pension contribution has more opportunity to grow.
Stakeholder pension plans have the reputation of being the cheapest pension plan around as they have to meet certain government restrictions on cost. But it’s important to really zoom in on the costs, as management charges might still be higher than you think and more than if you went down the DIY route. Like a SIPP, it’s easy to find a stakeholder pension with a rock-bottom minimum monthly contribution and there is flexibility for those wishing to regularly alter their monthly contributions. However, with a stakeholder pension investment choices are often the most limited with just a few funds on offer. ASIPP may be more attractive if you want more freedom to choose your own investments.
Whichever savings route you go down for the future, be in doubt of the many opportunities to prepare for your retirement as a self-employed individual. If in doubt about which product to choose, it’s always best to seek professional support from a financial adviser who can recommend a product to suit your bespoke circumstances.