Abel is a research project manager. And he, like 4.8 million people in the UK, has opted to go it alone after 22 years working as an employee. We’re seeing more and more that hype around the ‘gig’ economy (a system based on short-term contracts with multiple employers) is giving employees the prod they need to give freelancing a go. Yet there were serious questions he wanted to put to us before he could confidently fly solo.
This “case study” is based on a real-life client of our financial advice team but the details have been heavily anonymised to protect the client’s privacy.
If, like Abel, you’re self-employed working freelance, time is money. Those long tea breaks or leisurely hours spent “working from home”are easier to stomach on company time. But in choosing to work for oneself, every hour of the working day counts.
It’s a tricky adjustment, albeit one many of us plan to make. Researchers expect that by 2020 half of all workers will turn freelance, lured by the promise of flexible, more varied and oftentimes more exciting work.
Knowing your financial circumstances
For Abel, the tipping point came after he finished paying off his mortgage. That’s not to say the usual concerns around self-promotion and job security evaporated. However the milestone felt liberating enough to make him take the plunge.
On first speaking, Abel told me he felt confident of earning at least £50,000 a year, enough to support himself. But when you go it alone there is no employer paying into your pension. Abel approached Nutmeg to ask how much he should invest for his retirement and how he should go about setting up a personal pension.
He had already built a cash buffer to support his business (a very wise idea might we add). In doing so he had reduced his employee pension contributions, leaving his pension pot at £65,000. He felt this sum was unlikely to give him the comfortable retirement he wanted, meaning he would need to contribute more to his pot. But how much more?
Abel’s plan in self-employment was to put away 8% of his income to mimic the minimum contribution required under auto-enrolment (as of 5th April 2019). He wasn’t sure whether a monthly or annual contribution would better suit his needs. Abel also let us know that he expected to inherit around £300,000 in the not-too-distant future.
Firstly, we commended him for choosing a pension, something many self-employed people don’t do. While the self-employed population accounts for 15% of the UK workforce, half of the self-employed people in a survey we commissioned said they didn’t have a pension pot. Those who do, pay in just £77.46 a month on average – less than half the average contribution of £169.85 a month1.
Pensions are a great way to invest for the future because they benefit from tax relief, regardless of whether you are self-employed or working for someone else. If you’re a basic rate taxpayer, for every £100 you contribute to a pension, you effectively get a top-up of £25 from the government.
If you earn more than the higher-rate tax threshold, which is £50,000 in the current tax year, you benefit even more from tax relief. Abel expects to earn slightly more than £50,000, which means that any pension contributions made from that surplus would be especially tax-efficient.
If you have a “relief at source” pension, which is what we offer at Nutmeg, your pension provider adds basic-rate tax relief straight into your pot (higher-rate taxpayers can usually claim back additional tax relief in their tax returns).
Building a financial plan
After speaking to Abel and assessing his financial situation, we agreed some numbers against his long-term plans:
- He would stop work at 60.
- His desired lifestyle in retirement would cost £30,000 a year.
- He would receive the inheritance in 15 years’ time (as a basis for modelling).
We established that, without the inheritance, Abel would not reach his desired goals. His options, in that instance, were:
- Invest more for his retirement – an extra £8,000 a year inhis pension or £10,000 a year in non-pensioninvestments.
- Work until 68 years of age, giving him more time to pay into his pension and alsotaking him to the time when he would receive a state pensionon top of his own income.
- A significantly lower standard of living, at £15,000 a year rather than £30,000 a year.
In agreeing to these terms, we created a report for Abel, in which we covered:
- The advantages of making regular contributions, including pound cost averaging, healthy savings habits, and the use of lump sums to allow more flexibility should his business need more liquidity.
- The different ways of making contributions, both as an employer contribution from a company or as a personal contribution, together with the different tax treatments of either.
- Modelling whether he was on track for a reasonable standard of living when he no longer wished to work, both with and without potential future inheritance.
Nutmeg pensions offer flexibility. You don’t have to contribute the same amount each month and you can invest a lump sum if you prefer. As they were for Abel, our advice team are always on hand to help you decide how much you should invest in your pension.
Many of our customers are self-employed. They include freelancers, entrepreneurs and even successful sportspeople. They use Nutmeg to invest their money easily, transparently and at a low cost.
Let us help you with your retirement planning, so you have the time and energy to spend on what matters – the work you care about.
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. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.
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Lisa Caplan
Lisa Caplan is head of financial advice at Nutmeg. She combines her wide experience of developing brands for blue chip companies with eight years as a chartered financial planner delivering financial advice to a range of people at different stages of their lives.Other posts by Lisa Caplan