How to save for a pension when you're self-employed
For many people who are self-employed and paying rent, mortgages and bills, living hand to mouth is the only option - and the idea of putting aside money for a pension is a pipe dream.
According to a survey by the Office for National Statistics (ONS), self-employed workers aged 35-54 are more than twice as likely to have no pension wealth than those who have an employer.
It’s all too easy to forget your pension when you’re your own boss. But the fact is that – self-employed or not – saving for your future is vital if you want to be able to retire later in life.
Chris Sanderson, the CEO of Limber – an invoicing, tax and pension tool which enables freelancers people to manage their finances – offers some tips and advice on how to save for retirement when you’re self-employed.
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“Saving for a pension is often the last thing on your mind when you start out on your own,” he says. “Around 20% of 18-34 year olds have contributed nothing towards their pension in the UK while only 30% of self-employed people have an active pension.
“I think the main reason for this is ease – with other paperwork involved, pension is yet another bit of admin and if paperwork isn’t your thing, a pension just becomes a perpetual tomorrow job,” Sanderson says.
“As a self-employed individual, you don’t get the employer contributions either so that doesn’t help. Finally, self-employed people are often nervous about upping their rate or taking a pay cut to save towards the future – since some of them tend to live invoice to invoice, that can be a scary thought.”
Do it on day one
“If you wait until day 30 or day 90, you’ll notice a reduction in your income and doing paperwork is enough of a disincentive as it is,” Sanderson says.
“Our view is a pension needs to be as automatic for freelancers as it is for employed people and freelancers should add employer’s contributions to their pension with every invoice they send.”
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“We also believe people need other ways of building value for their future,” he adds. “That’s why with every penny our users invoice using our app Limber, we offer them equity in our business. Cooperative structures like this are another way we can help those with uncertain income streams build towards their retirement.”
You could also the costs of a pension onto your client. “Remember that clients will pay up to 17.8% on top of their employee’s salaries for national insurance and pension contributions so don’t be shy in asking them to cover a 4-8% increase in costs to help you save for your future,” Sanderson says.
Use technology
It’s also a good idea to use technology to help you save. “Our app, Limber is just one option, but check out other players in the market, like Penfold – this will cut down significantly on your paperwork,” Sanderson says.
“Luckily the startup world has latched onto this problem and there are solutions emerging. Not just our app, Limber, but other fantastic new products like Penfold will help self-employed people have better long-term financial security. On the other hand, Fintech apps like Monzo and Moneypot similarly help people keep their day to day finances in check. But whatever you do, I’d recommend doing something and make it a priority.”
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What is a personal pension?
A personal pension allows you to choose your own pension provider and put aside a set amount each month.
There are three types of personal pension. Ordinary personal pensions are offered by most large pension providers. Stakeholder pensions are where charges are capped at 1.5% and you can stop and start payments without risking paying a penalty.
Self-invested personal pensions offer a wider range of investments but often come with higher fees.
How much should you save into a pension?
How much to save into a pension is entirely up to you, as long as your plan doesn't have minimum contributions.
A comfortable retirement should cover the purchase of everyday essentials such as food, clothes, utilities and transport, as well as things like leisure activities.
