How do pensions work when you’re self-employed? I always hoped that I’d be able to continue paying into a pension while freelancing, but I knew it was something I may have to compromise on. With my income being a complete unknown for this first year, it’s one of the few financial responsibilities that’s flexible if you need. So how has the plan worked out?
What are your responsibilities?
The great thing about a pension, unlike tax or national insurance, is it’s entirely your choice. I’ve always paid into a pension since I started working after university so it’s important for me to continue. But I can’t deny it’s been helpful to know if my income was low, it was something I could reduce, or even drop, for a while if I needed to. On the flip side, there’s also a really healthy maximum amount you can pay in while still receiving tax relief – currently £40K.
How much to pay in?
Canvassing opinions from fellow freelancers, it seems there’s a few different approaches – some are paying regular amounts and some are paying in chunks as and when it’s a good period. I don’t know whether my mind is still too locked on employment mode, but I’d been going on regular amounts based on what I was paying in in my last job. I used to have 15% a month based on the maximum contributions allowed of 6% by me and 9% by my employer. It makes sense to me to try and match this, for continuity at least.
It’s also good to know that while I don’t have an employer to top up my contributions, when I save into a pension plan, my provider can claim tax relief and top up my pot by 20%.
When to pay in?
There’s a lot more flexibility paying in while self-employed. I made the call this year to hold back on monthly payments in case there was a sudden drop in income that I needed to cover. I’ve been running a system of having all my freelance income paid into a bank account that’s separate from my day-to-day one (and it’s a personal one as I don’t have a limited company and therefore I don’t need to pay for a business bank account). Every month I pay myself a “wage” from my work account into my personal day-to-day account for spending and bills. It works well because it controls any spending and because the year’s been successful it means I’ve held back money to decide what to do with at the end of the year – pension being one of them! So I’m calculating how much to pot in now the year’s coming to a close.
Specifically I want to put money in before the end of the financial year because it’s classified as an expense, which means I get maximum financial benefit of paying into it before I calculate my tax bill.
Where to pay in?
Like a lot of people I’ve ended up in a situation with a number of pension pots because of different jobs. My key criteria going forward are well-performing, ethical, easy to use and easy to amalgamate. I’d had recommendations of Nest and I like them from what I’ve seen. Their set up is straightforward – easy navigation, plain English and simple to change your details, preferences and pots. I love how easy it seems to transfer a pension in and they offer a no-fee transfer out as well. It seems completely at odds to a few financial advisors I’ve spoken to who charge for amalgamating pots, and at a really high cost. Now there might be a lot more to it, such as an in-depth financial review but I can’t get my head around spending thousands on it.
So I’ve gone with a test – transferring in a poor-performing old pension with a provider I was locked into because of the employer to start with. Then I’ll be adding in my freelance contribution this year and then planning to add in regular contributions from here on it.
Initial Verdict?
I like Nest – so far it’s been easy to set up and really simple to do all the things I wanted, like choose an ethical fund and lower my retirement age slightly, since it defaults to the national age of 68. It feels like another big milestone to get this sorted, and I’m excited to consider moving my other pension in so they’re all in one place for easy access and planning.
Photo by Fabian Blank on Unsplash