Financial planning for the self-employed: your questions answered

The Nutmeg team


5 min read

The self-employed cannot simply leave their retirement strategy to employers. And more power to them for that. But this fierce independence brings challenges, many of which our Nutmeg advisers contend with on a daily basis. Here, we share our responses to your most commonly asked questions about financial planning for the self-employed.

Should I consolidate or diversify my pension?

If you’ve worked more than one job, it’s possible you’re sitting on more than one pension pot. Perhaps you’re one of the estimated 1.6 million unlucky people in the UK whose provider has lost touch with them and who have unclaimed pensions worth about £20 billion. In any case, pension consolidation can help you get a firmer grip on your financial situation.

It could be there’s a better deal out there. For instance, one with lower charges and not limited in investment style. You may, for example, want your nest egg to be managed ethically. Remember, it’s your money. It’s up to you who manages it – and how much you pay your provider.

Now, there is a danger that transferring funds will come at an initial cost, or that leaving a scheme could incur penalties. It may even be that you risk losing out on plus points such as safeguards on benefits or guaranteed annuity rates. For these reasons and more we recommend you check-in with your provider before beginning a pension transfer. You may also like to seek experts in the art of financial planning for the self-employed.

 

 

The point is that consolidating your pensions with a provider of your choosing puts the power into your hands. And parking your hard-earned savings with a single provider, particularly one with a robust digital platform, means you can be both more proactive and informed when it comes to how your money is managed.

You might have guessed where we’re going with this. Financial planning for the self-employed is one area in which we have experience. Nutmeg pensions are designed to give you transparency over how your money is invested and control over how much risk you take. They’re also cost-efficient, because fees can add up over time to diminish the value of your self-invested pension.

Should I save or invest?

We are an online wealth manager, so you’d expect us to say “invest”. However, saving and investing play very different roles in a financial strategy and the truth is that this is not a case of either/or.

If you are putting money aside for more immediate items – let’s say a business trip or a deposit on a workspace – the relative certainty of cash trumps the volatility of investment. Cash is both reliable and easily accessible.

The problem is that, due to inflation, cash savings will not significantly grow in value. In fact, the real value of cash savings may actually decline over time.

Your intention with any investment should be to grow your available wealth for the medium to long term, by which we’d recommend at the very least three years (though we’d recommend more), by investing in things you believe will increase in value. Doing so opens up opportunities to unlock higher returns. But, as with any investment product, there is a risk that you get back less than you originally put in.

At Nutmeg, we invest in exchange traded funds (ETFs) using a transparent, cost-effective and flexible investment strategy that you can learn more about here. We offer portfolios at different risk levels so you can decide how much risk you want to take.

We know all too well that, whether you’re a sole trader or an owner of a limited company, time is precious. However, we would encourage you to make the time to plan for your future.

If you’re unsure about your situation, you can plot out your finances with our financial planning tool. If you’re still not sure, get in touch with one of our in-house financial experts for personalised planning and advice.

If I have surplus income, should I overpay my mortgage or put that money into a pension?

As with any financial decision, overpaying your mortgage will work for some and not others.

While you may become debt-free sooner, investing your money in a pension could lead to better long-term returns and, by diversifying your assets in this way, you could strengthen your financial position.

One way to play it is to funnel your finances into the area that troubles you most. Research commissioned by Nutmeg shows that more than two thirds of us in the UK are concerned we’re not putting enough money aside for our twilight years. That’s more than were concerned about mortgages (49%) or supporting their parents (51%).

Granted, property has posted some impressive returns in recent times, but these are by no means guaranteed, nor are they necessarily predictable enough to depend on in retirement.

More than that, property is an illiquid asset. You may find it hard to get money out of your home and into your pocket, and you may get back less than you expect.

 

There are additional pitfalls for those of you in the buy-to-let market. New tax rules will make it more difficult to offset interest costs against the money you make in rental income. Instead, you’ll get 20% tax relief on the interest payments. You can expect the changes to be fully phased in starting April 2020.

Choosing instead to pay into a pension pot can be a more straightforward and cost-effective approach to growing your investment. And yet, many self-employed people, for whom growth is their bread and butter, overlook the benefits. According to our research, the average self-employed person invests just £77.46 a month into a pension scheme – less than half the average contribution of £169.85 a month1.

If you own a limited company, you can make an employer contribution to your pension up to a £40,000 allowance. You’ll also be pleased to know that these contributions are an allowable business expense, meaning they are free of corporation tax. You might not have an employer making contributions, but you can still benefit from tax relief. This means that, if you’re a basic rate taxpayer, for every £100 you contribute, you’re eligible for a top-up of £25 from the government.  If you have a “relief at source” pension, which is what we offer at Nutmeg, your pension provider adds this straight into your pot.

We realise that a freelancer’s income can be sporadic. Knowing where the next pay packet is coming from can be hard to predict, so saving for a pension can easily fall down the list of priorities. Make it the priority, however, and you may unlock a secure income stream.

 

 

Sources

  1. The survey was conducted by Populus on an online sample of 2,076 GB/UK adults between 2-4 July 2019. Data is weighted to be representative of the population of Great Britain. Targets for quotas and weights are taken from the National Readership Survey, a random probability F2F survey conducted annually with 34,000 adults. Populus is a founder member of the British Polling Council and abides by it rules. For further information see: http://www.britishpollingcouncil.org

Risk warning: 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice.

 

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