Self-employed? 5 smart ways to save for your future

Tradesman in his workshop smiling and holding his iPad with a brown apron on.

Savings

MoneyPlus Features Team

16th October 2017 at 5:06pm

There can be many benefits to freelancing or running your own business – flexible hours, the option to work from home, no fixed holiday allowance and, of course, the chance to follow your passion.

According to recent Office for National Statistics data, it’s becoming an increasingly popular trend with nearly 15% of all people in work now self-employed.

If you’re one of those who have branched out on their own, or you’re thinking about it, making self-employment work for you is not just about making sure your business is profitable enough to pay you a salary. You also need to think about your long-term future.

With this in mind, here are our five smart tips that can help you take important steps to secure your financial future while you focus on your business.

Tip one – get a pension

Auto-enrolment rules introduced in 2012 mean that most people working for a company will be automatically enrolled in a workplace pension by 2018.

However, if you’re self-employed you’re not covered by this and have to start saving for your retirement on your own.

It’s never too late to start and if you’re self-employed you can choose between a personal pension, a stakeholder pension or a self-invested personal pension (SIPP).

The differences are the investment choices available to help grow your pot, the level of charges you pay and the flexibility on how you can access your pension in retirement. You can also save with the National Employment Savings Trust (NEST) if you’re self-employed or the sole director of a company that doesn’t employ anyone else. NEST is the workplace pension set up by the government.

Whichever you choose, saving into a pension is one of the most tax-efficient ways of saving for your retirement. You receive tax relief on your contributions in to your pension and your savings have the possibility of growing over time with minimal tax.

If you pay the money into your pension you usually get 20% tax relief. And this is 40% or 45% if you’re a higher or additional-rate tax payer.

You can use online calculators to help you work out how much you may have to save each month to keep your savings on track and help provide the income you need, including our pension calculator.

The Pensions Advisory Service also provides some guides and tools, including information on how much you can save into a pension. 

Tip two – know your state pension entitlement

Anyone reaching state pension age today who has paid enough National Insurance contributions will get a State Pension of £159.55 a week when they retire, which is just over £8,000 a year – but not everyone does get the full amount.

Self-employment is not only about your short-term gains, you need to think about your long-term future too

Knowing what you might get from the state pension can help you estimate what you might need for a comfortable retirement, and put plans in place to cover any shortfall. As a rough guide, we’d suggest that people are likely to need around half their pre-retirement income.

It’s also important to know the age you will qualify for the State Pension and you can check this on go.uk at ‘Check your State Pension age’.

Tip three – flex your finances

If, like many self-employed people your earnings vary from month to month you may want to keep your finances flexible where possible. ISAs can be a great complement to pension saving for the self-employed. As well as being tax-efficient, they give you easy access to some of your savings – useful if your earnings can be unpredictable.

This tax year, make the most of this year’s biggest ever ISA allowance of £20,000. You can choose from stocks and shares ISAs, cash ISAs, or a combination of the two. A cash ISA can also be transferred to stocks and shares ISA and vice versa. 

Tip four – protect yourself and your loved ones

If you’re self-employed, you won’t have access to some of the protections which come as standard if you’re working for many companies, such as sick pay, death-in-service benefit, or health insurance. So it’s worth considering what protections you need to put in place for yourself and your family. The Money Advice Service provides some useful information on personal insurance when you’re self-employed.

Tip five – get smart about tax

One challenge if you’re self-employed is making sure you’ve put money aside to pay your tax bill. There are lots of tools and calculators on the web to help you calculate how much you’ll need to set aside, including this self-assessment ready reckoner on gov.co.uk.

A good tip is to save into a separate account on a regular basis. This will stop you spending the money and you won’t feel out of pocket when it comes time to make the twice-yearly payments in July and January. Plus, if you put it into a savings account, you’d get at least some interest.

Due to tax relief, the money you save into a pension may reduce your overall tax bill.

This happens because of the way tax relief on pensions works, meaning you could end up paying less tax. For more information on tax and pensions, go to our website or gov.uk. 

Laws and tax rules may change in the future, and the information here is based on our understanding in October 2017. Your personal circumstances also have an impact on tax treatment. Both pensions and stocks and shares ISAs are an investment and, as with any investment, the value can go down as well as up and may be worth less than what was paid in.

Standard Life accepts no responsibility for the content of third party websites referred to in this article. This is provided for general information only. We would always recommend that you seek the proper financial advice before making any decisions.