PensionsPersonal Finance

Arranging Your Self-Employed Pension

Arranging Your Self-Employed Pension

We love to help people who are setting out on their own as a freelancer or contractor – especially since it isn’t always easy to get your finances in shape when you’re only just starting out.

Unfortunately, one thing that a lot of freelancers seem to skip out on is their pension. This is rarely a good idea: although you’ll be entitled to the state pension when you retire, it’s unlikely that this alone will be enough to help you get by.

According to stats released by the Office of National Statistics in 2018, around 45% of self-employed people between the ages of 35 and 55 have no private pension at all (that figure drops to just 16% when you look at people in employment). Setting up a pension isn’t a lot of hassle, though, and the benefits far outweigh a little bit of admin at the start. This quick guide should help to get you up and running.

Choosing a pension fund

Arranging Your Self-Employed Pension

In most cases, you’ll probably want to choose what’s known as a personal pension fund. This is a fund that you manage yourself: you’ll be able to choose how much you pay in and how you want those contributions to be invested.

Banks and building societies can often provide personal pensions, and you might want to go with a brand that you recognise – somebody that is well-established and potentially more secure. Reading reviews should help you to find a company that offers high quality service as well as decent pension management options.

There may be a fee associated with setting up and managing your pension, and there may be minimum contributions that you need to make: these are both important things to look into when choosing your provider.

Making your investment

Arranging Your Self-Employed Pension

Next, you need to decide how your money should be invested. Most providers will automatically put your money into a default fund, so this isn’t something that you need to panic about. However, since choosing where to invest your money is a lot less complicated than it sounds, it makes sense to give it some consideration.

Typically you can choose to invest in a mix of cash, shares, bonds and property. Your pension provider should tell you how risky each option is, as well as what the return on your investment might be. It’s often recommended for people earlier in their careers to choose higher risk investment portfolios, as you will have a longer time to see these investments pay off.

Deciding how much to save

Arranging Your Self-Employed Pension

Obviously, you always need to cover your basic living expenses first. But your pension should be right up there as the next most important cost. This means that you should aiming to put a substantial chunk of your salary away each month. As a rule of thumb, many people suggest that you should be aiming to invest the percent of your income that is equivalent to half your age at the time you started your pension. So, if you started at 24, aim to save 12% throughout your career. This accounts for the fact that people who start their pension later will need to save more to make up the shortfall.

Your pension provider will automatically claim tax relief on the savings that you make, and add the total to your pension pot. This is effectively free money that can help to boost your pension, and another great reason to make sure that you’re saving: effectively, any year that you don’t make a pension contribution you’re throwing this tax relief away. You should be mindful of the fact that you only get tax relief on the first £40,000 that you save.

Once you’ve got your pension set up, and you’ve scheduled a regular contribution, you can think about it as little or as often as you like. You certainly don’t need to micromanage it every month – although if you decide to change your investment strategy or move to another provider, you’ll always have the control that you need.

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Master of the budgets. Provider of the tips. Author and owner of DumbFunded.co.uk.
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