Great news! Human life expectancy is increasing. Earlier this year, The Independent newspaper published an article with the bold headline: There is someone alive today who will live to be 1,000 years-old. “Hurray, more time to translate!” I hear you cry. But what if, secretly, you’d really rather not? Perhaps you quite fancy taking a break to travel the world in your golden years? Maybe, by then, it could even be a space shuttle cruise around the galaxy.
Even if we live to the more widely-expected average age of around 80, we might just have to think about that thing that 43% of freelancers in the UK (compared to only 4% of those in employment) don’t yet have: a personal pension.
When I finished my languages degree, I didn’t expect I’d end up spending many years working as a specialist pensions lawyer. It certainly wasn’t a childhood dream, since it didn’t feature on TV shows like This Life or Ally McBeal (my first impressions of what lawyering would be like). I struggle with numbers almost as much as I love working with words and, in my early twenties, thinking about retirement—mine or anyone else’s—was not exactly high on my agenda. But fast forward a few years and, lots of legal training later, it somehow happened.
There, I was struck by how important pensions actually are. In the last few years, you only have to look at the news headlines about BHS and British Steel to see what an impact they can have on large companies, individuals and government policy alike. Equally, it’s concerning just how complex and daunting pensions can seem, being highly-regulated and full of legal and financial jargon. In many ways, working in the pensions industry felt like learning another language (one of the reasons the job ended up appealing to me).
In a bid to increase retirement saving, the law now requires employers to ‘auto-enrol’ workers who meet certain conditions into a workplace pension. However, auto-enrolment doesn’t yet apply to freelancers, who have to fend for themselves. I’m realising just how much more difficult it can be for the self-employed to get started with no employer and HR department to organise things for you. Here are some common things I’ve heard freelance colleagues say (a few of which I’ve said myself!) about why they aren’t making pension contributions:
- “I can’t afford it”
- “I’ve got other savings, I don’t need to”
- “It’s a long time away, I’ll deal with it another day”
- “I don’t have a predictable income. How can I commit to saving?”
- “I’ll get by. I love my job and I do it from home, so I’ll just carry on working”
- “I’ll just rely on the State Pension”
- “I have no idea where to start”
As a self-employed person, it is entirely up to you. Not having any separate pension saving may be sensible in your circumstances. Unfortunately, it may also be motivated by misunderstanding, lack of information or perceived complexity. Don’t let this deter you from investigating your options. Although I’m not able to give financial advice, I’d like to share some of what I learned, in the hope it can demystify things and help other freelancers start thinking about how to provide for their retirement in a way that suits them. If you’re inspired to look into this in further detail, you could seek advice from a regulated independent financial adviser (links to find one are below). The Pensions Advisory Service is also soon to launch a free ‘Midlife Review’ service for self-employed people aged between 35–55, which aims to give impartial advice and information on pension options.
The UK State Pension
At the time of writing, the UK offers a flat rate State Pension of £164.35 a week (for the 2018/19 tax year). The ability to claim the State Pension is based on your National Insurance record. The age at which you can claim the State Pension is under review. The Government has announced plans to raise the State Pension Age to 68 between 2037 and 2039. There are no guarantees about what the State Pension will be in the future. You can check your current State Pension entitlement on the Government’s Pension Service website.
Setting up your own pension: the options
You might also want to consider making your own pension arrangements. There are various personal pension options for freelancers, ranging from those requiring you to do relatively little to those allowing you to be very engaged in your investments. They offer varying degrees of flexibility, fund options and charges. The Government’s own workplace pension provider, the National Employment Savings Trust (“NEST”) is now also open to the self-employed.
If you run your business using a limited company, there will be other possibilities not covered in this post.
How does a personal pension work?
Personal pension providers offer a “Defined Contribution” pension (so-called because you know what you are putting in, but the value of what you will take out will fluctuate). You contribute a certain amount to your “pot” which is then invested until retirement and hopefully grows over time. Your pension provider will offer a range of investment options, including “default” funds designed for those who feel less confident in making investment decisions and/or who want to be more passive. Many providers offer sophisticated online platforms with tools to help you map out your options and manage your pension more easily.
What you get back on retirement will be:
Your contributions MINUS the pension provider’s charges PLUS (or MINUS) investment gains (losses)
You then use what’s in your pension pot to provide for you in later life. Historically, this has meant purchasing an “annuity”. This is essentially where you sell your pot of cash to an insurer and, in return, receive a regular income for the rest of your life (and, in some cases, for your spouse/dependants). However, in the last few years, the Government has introduced more flexible options, including the ability to take cash lump sums (including some tax-free) in certain circumstances.
Contributions attract tax relief up to the lower of your annual earnings or £40,000 a year. For basic-rate taxpayers, for every £100 you pay in, the Government will add a further £25.
What can I contribute?
How much and how frequently you want to contribute will depend on your individual circumstances, but things to think about include:
- What can you afford?
- What kind of lifestyle would you like to have in retirement?
- When would you like to retire?
- Will you have any other income?
It’s impossible to predict exactly what your pension will provide when you retire. However, there are helpful tools online that will provide an illustration.
For freelancers, one challenge may be that you can’t count on a regular monthly income. I had a look around at some of the well-known providers and plenty offer some kind of flexibility to save small monthly amounts and/or one-off lump sums, whenever you can afford, without charge for changing or stopping the level of contributions (for example, I have seen minimum one-off contributions set as low as £10).
Pensions from former employers
If, like me, you’ve come to freelancing from another job, you might also have pension pots connected to that job. If you’re not sure, the Government offers a free tracing service. Once you’ve found these pots, think about whether it would be sensible to consolidate these. This will depend on the detail, as you might have valuable benefits (such as a ‘defined benefit’ or ‘final salary’ pension) that are worth leaving where they are. You will also need to weigh up the costs involved in transferring your pension against any potential savings.
It’s worth keeping an eye on pensions, as the landscape is constantly changing. For example, there is increasing traction behind the idea that auto-enrolment might be extended to apply to the self-employed (potentially through the income tax or National Insurance systems). Freelancers will need to engage with such proposals and play a more active role since I don’t think we’ll need to live for another thousand, or even ten, years for these changes to affect us!
The Pensions Advisory Service Spotlight Brochure: Pension saving for the self-employed and small business owners (goes into quite a bit more detail on topics beyond the scope of this post).
The Pensions Advisory Service Midlife Review appointments (for those aged 35–55)
The Money Advice Service Retirement Adviser directory
Pensionwise offers free telephone or face-to-face appointments for those aged 50 or over with a personal or workplace pension to discuss options.
Tracing an old pension:
The State Pension:
This is a guest post by Sarah Bowyer, a freelance translator from French, Spanish and Portuguese into English. She specialises in legal translation and has particular interests in Human Resources and Sports Law. She is a qualified solicitor and has spent almost a decade working for two well-known international law firms. She studied Modern Languages at the University of Cambridge and the École Normale Supérieure, Paris and has lived and worked in France, Spain, Belgium and Switzerland. You can find her at her website and on Twitter.
Note: this post is intended for general information purposes only and should not be used as a substitute for professional legal or financial advice. Neither the blog host nor the author is responsible for any result arising from any reliance placed on this post nor any replies or comments.