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There are many great reasons to become a freelancer - a chance to follow your dreams, be your own boss and fitting work around family life being just a few of them. However, one of the downsides is that there is no automatic option available to you when it comes to saving for your retirement. As the average life expectancy keeps rising, it’s worth thinking ahead to how you’ll fund those later years when you may well have stopped working. Here are just a few ideas for how to start planning now for that wonderful future!
Once you register as self-employed with HMRC (the UK’s government body for taxation - www.hmrc.gov.uk ) you will be given advice about paying your own tax and National Insurance (NI) contributions. Both of these are compulsory once you are earning over a certain amount, but you have the option to make voluntary NI contributions before you reach this point. The advantage of this is that each year in which you make NI contributions counts as a year towards your state pension. Therefore, if you make these payments (currently standing at around £10 a month) you will be entitled to a larger proportion of your state pension entitlement than would otherwise have been the case.
Individual Savings Accounts (ISAs) allow you to save a certain amount of money without paying tax on it. For the 2012-2013 financial year this amount is £11,280, of which £5,640 can be saved in cash. The rest of the amount can be made up by investing in stocks and shares. You can add to this in each tax year, meaning that by the time you retired, you’d have a reasonable nest-egg without having had to pay tax on it. There are many different ISA providers, so check an independent financial advice website such as MoneySavingExpert for which ones are offering the best rates.
Pensions work by taking however much you invest (which you can do tax-free) and spreading this money across different stocks and shares (called an investment portfolio). With Personal or Stakeholder Pensions, the decision about which stocks and shares are chosen is made by your pension provider, with little or no input from you. Obviously pension providers have a lot of experience and are therefore likely to make relatively ‘safe’ choices. The provider will charge you annually for managing your investment. For Personal Pensions, the charge will be a percentage of the value of your investment, but for Stakeholder Pensions this charge is capped at 1.5%. However, Stakeholder Pensions give you a more limited choice of investment options. The advantage of this type of pension is that you don’t have to manage it yourself and all the necessary research and maintenance is done by your pension provider on your behalf.
A Self-Invested Personal Pension (SIPP) is a private pension plan over which you are able to maintain more control than is usually the case (see Personal and Stakeholder pensions, above). You can choose which investments the pension fund makes on your behalf and you manage the investment portfolio yourself as well, from the point you make the first investment until the point you retire (at which point you choose whether you would like an income or an annuity). You must be confident enough to do all this yourself, as although it is possible to make significant savings by following this route, you will have no comeback if things don’t work out as you’d expected. Seek financial advice before you get started, to ensure you’re aware of everything that’s involved.
A regular savings account is not as preferable an option as a pension fund as you will be charged tax on your investments. However, it is always useful to have a savings account working alongside your pension fund (if you have the means to do this) as this will spread and lessen the risk - savings accounts are even lower risk than pension fund, as the money is effectively stored by the bank and not invested elsewhere.
Again, if you are able to do so, investing in property is always seen as a reliable and valuable strategy. It is considered low-risk in the long-term, despite the fact that short-term fluctuations in the value of your property may occur. As long as you can secure the funds for an initial deposit, it is also rewarding to feel that you are contributing to your future financial security by paying your mortgage each month, rather than paying a similar amount in rent to someone else.
As a general rule of thumb, according to the Money Saving Expert website, each year you should be investing a percentage that is equal to half your age when you start the pension fund, i.e., if you start investing when you are 30, you should pay 15% of your annual salary into a pension. This then needs to continue throughout your working life. This sounds like a frighteningly large amount, but if this isn’t possible then the advice is to save whatever you can and then increase it little and often. Keep accurate accounts of your incomings and outgoings and use these to regularly reassess how much you are earning with a view to increasing your pension contributions whenever possible. As a caveat to this, however, it does make sense to pay off any significant debts before you start a pension as you are likely to be paying high rates of interest on these.
I know that all of the above can seem overwhelming at first, but with a little bit of research (and the aforementioned moneysavingexpert.com is great place to start, though of course there are other reliable online sources as well) and a visit to your local bank and/or independent financial advisor, it will all become a lot clearer and you’ll soon establish which is the best option for you.