The cost of self-employment: Securing your financial future

Self-employment can provide far greater flexibility and allow you to pursue passions. But it does come at a cost when you consider long-term financial security. Luckily, there are things you can do to secure your future.

In recent years, there’s been a rapid growth of the self-employment market in the UK. According to official statistics, there were 3.3 million self-employed people in 2001. This accounted for 12% of the labour force. By 2017, this had increased to 4.8 million and accounted for more than 15% of the workforce. The growth of technology has led to far more self-employment opportunities. With the ability to work almost anywhere in the world, self-employed workers can connect with businesses around the world.

The financial impact of self-employment

The benefits of self-employment are often related to the flexibility on offer. You’re able to work the hours you choose and select clients, for instance. But in the long term, it could mean falling behind financially without careful planning.

All employers are now required to offer pension schemes to the majority of employees. It means those employed are now automatically enrolled in a pension. As a result, they benefit from employer contributions, tax relief and investment growth. But this isn’t the case for the self-employed.

Currently, auto-enrolment figures mean employees contribute a minimum of 5% of pensionable earnings. The minimum contribution for employers is 3%.

According to research from Aegon, a worker setting out on their own after ten years in an employer workplace scheme could be around £115,300 worse off at State Pension age. This assumes that further deposits aren’t made when self-employed. Of course, as a self-employed worker, you’re can set up your own pension and maintain deposits. Yet, due to the loss of employer contributions, you could still fall far behind those with a workplace scheme.

Steve Cameron, Pensions Director at Aegon, said: “Auto-enrolment has been a big step in the right direction for many employees to kick start their pension savings, but the self-employed who don’t benefit from this find themselves lagging behind.

“Saving for retirement is often very difficult for the self-employed as many have highly variable earnings and often face foregoing income to invest in their growing business. However, where they can, individuals should look not just to maintain personal contributions at 5% but increase them as soon as their employer contributions are lost. Leaving this until later on in life will make it considerably harder to catch up and bridge the gap with employees.”

Protecting your future in self-employment

The first step to improving your financial security is to understand why it’s important. After this, you can start taking steps to improve it. These five are a starting point for boosting your retirement income.

1. Set up a pension

The first thing to do is set up a pension you can pay into.

There are several different types of pensions to choose from. Ordinary personal pensions are the most common and will offer a range of funds to choose from. For those that want more control, a Self-Invested Personal Pension allows you to choose investments but comes with more responsibility. You should assess the different options before choosing one, as well as researching providers. If this is an area you want help with, please get in touch.

2. Maintain pension contributions

With a pension set up, you should also set a contribution level you’ll pay in regularly. The current auto-enrolment minimum contribution of 5% is a good place to start. However, as already highlighted above, this will still leave a shortfall. Where possible, it’s a good idea to increase this. Remember, you don’t have to pay in the same amount each time. You can make one-off contributions following a busy month, for example.

Unfortunately, your contributions won’t benefit from employer contributions. However, tax relief is still valuable. This is paid on your contributions at the highest rate of Income Tax you pay. So, basic-rate taxpayers will only need to deposit £80 into their pension for a £100 boost. For higher-rate and additional-rate taxpayers, this falls to £60 and £55 respectively.

3. Manage pensions investments

Investment returns are essential for growing pensions. Thanks to compound growth, it can help your savings grow significantly over the long term.

Whether you choose to invest through a fund or have a more hands-on approach, managing investments is important. Reviewing how your money is invested and whether it aligns with your risk profile, are essential. As are assessing fees and investment performance, taking a long-term outlook. You should have confidence in your investment plan and not feel the need to ‘tweak’ it regularly. But keeping on top of reviews can help get the most out of your savings.

4. Create a financial safety net

One of the reasons why adding to a pension can be daunting when self-employed is that your income may not be stable. It’s natural to worry about what will happen if you have a slow few months and you’ve poured your savings into an inaccessible pension. As a result, building up a financial safety net you can fall back on can give you the confidence to save more for retirement. Depending on your circumstances, this may be a cash savings account or financial protection policy, for instance. By improving your financial resilience in the short and medium-term, you’re able to plan for the future too.

5. Build up other investments

Retirement finances often focus on pensions. But many other assets play a role too. Building up a separate portfolio can help fund your retirement lifestyle too. The drawback here is that you won’t benefit from tax relief, which can be valuable. However, it does provide more flexibility. You’ll be able to make withdrawals when it suits you, which may be before retirement age. It’s important to keep in mind here that you should invest with a timeframe of at least five years in mind and ensure you’re taking the appropriate level of risk.

Self-employment doesn’t have to mean financial insecurity. Taking control of income and savings now can help set you on the right path. If you’d like help managing your pension and other assets, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.