Understanding Freelance Pensions
As a freelancer, you never really know where you stand when it comes to pensions. Do you get a State Pension as a freelancer? What is the best pension for the self-employed? How much should you put aside? It can be a minefield.
To answer these questions and more, we interviewed Chris Eastwood, co-founder of Penfold, who offers pensions for the self-employed.
Can you explain, in a simple way, what a pension is?
Put simply, a pension is a tax-efficient way to save for life after work. Think of it like a savings pot built for your retirement.
Over your career, you can add to this savings pot by contributing from your income, whether that's a salary from an employer or profits from a business. Little by little, your pot grows until you're ready to stop working.
The government encourages people to plan for their futures by offering tax relief on pension contributions, making your money work more efficiently.
This means by contributing to your pension, you end up paying less tax, keeping more of your hard-earned money. You can withdraw your pension from age 55 (rising to 57 in 2028) and use it as an income in retirement.
What are the basic options available and what questions should I ask providers?
There are three main pension types - the State pension which offers a small weekly amount based on National Insurance contributions over your life, workplace pensions are those set up by employers with contributions coming directly from your salary and private pensions which you set up and contribute to on your own behalf.
If you’re looking to set up a private pension make sure the provider has the ability to make flexible contributions rather than a set monthly amount, offers automatic tax relief, has a choice of investment options and has a high review score so that you can be sure they offer a great service.
Do I get a State Pension as a freelancer?
If you're self-employed you're entitled to the State Pension in the same way as anyone else. The new flat-rate State Pension was introduced in 2016 and is based entirely on your National Insurance record.
To be eligible to claim, you must have at least 10 'qualifying years', which essentially means years you were working or claiming benefits that qualified for National Insurance contributions. To get the full State Pension amount you'll need to have 35 qualifying years.
To find out how many qualifying years you've earned and when you'll be able to claim, head to the government's website. You can also get more information on how to increase your qualifying years if they need a boost.
For many, living on a weekly income of £175.20 won't be enough to support a comfortable standard of living in later life. This is why it may be a good idea for you to make other arrangements, such as taking out your own private pension, to fund your retirement.
How much should I be putting aside?
If you sign up for Penfold, we’ll help you figure this out by applying some helpful rules of thumb and making some assumptions about what sort of life you want to live when you’re a bit older. Have a play with our pension calculator to find out more.
How easy is it to merge old pensions and should I?
Recently, combining pensions online has become increasingly popular - helped in part by new, faster electronic pension transfers. Pension providers like Penfold also work as a pension consolidation app - letting you easily bring all your pots from previous jobs together in one place.
However, it's not always a good idea to combine. You could end up paying more or losing out on some extremely valuable benefits in retirement. Before you dive in and consolidate all your pensions, you'll want to carefully consider if you're making the right decision.
The benefits are less admin, it’s often cheaper as you’ll only have one management fee and it’s likely you’ll get more choice in where your pensions are invested such as sustainable funds.
It’s worth watching out for potential exit fees, although the savings in management fees may outweigh this. Some pensions also offer special benefits or guarantees, defined benefit pensions for example are a little more complicated to transfer and you'll need to chat with an independent financial advisor before making a decision.
Any things to look out for when setting up and choosing a pension?
If you’re self-employed we recommend making sure your provider offers flexibility when it comes to how much you pay each month rather than forcing a set amount.
Make sure the providers you’re looking at automatically apply the government’s 25% tax relief top-up otherwise you’ll miss out on this great benefit.
It’s also good to have options for where your savings are invested, great customer service verified by independent reviews and ensure any providers are regulated by the FCA and have FSCS protection.
Can we look at a pension as a tax-free investment account that has a time-lock on it?
Yes, to a certain extent, without going into the specifics of other account types a pension allows you to choose where your money is invested and you get tax relief on up to £40,000 of contributions each year.
Can you make payments to reduce your corporation tax bill?
Yes! If you’re set up as a director of your company there are many tax advantages that come from paying into your pension.
If you pay into your pension through your limited company you can contribute up to £40,000 each year and claim the 19% reduction on your corporation tax bill. Any amount paid into a pension by a business also won’t be liable for National Insurance so by paying directly into your pension rather than paying out as salary, you’ll also save by avoiding National Insurance contributions.
Making a payment into your pension through your business may be more efficient than making a personal contribution but will depend on your circumstances.
It’s worth seeking advice from a financial advisor if you’re not sure about the best option for you.
