I’m going freelance
Dear Holly
In the New Year I’m going to take the plunge and join the ever-growing number of self-employed people in the UK — I’m planning to set up on my own as a freelancer.
I’ve got an accountant lined up who is going to look after my tax returns, but I want to know the best place to keep money I put aside for tax bills. I know I need to set up a pension, but have no idea how to go about it. Help!
SP, Surrey
Holly says
You ask two important questions about issues that many freelancers don’t address.
Firstly, your pension… the 4.8 million self-employed in the UK are part of the fastest-growing sector of the workforce, yet they are the least well prepared for retirement. In fact, recent research by IPSE shows that in June 2018, 69% of the self-employed have no pension at all.
Aside from the necessity to save in a pension to fund retirement, let’s not forget the unrivalled tax breaks. They essentially offer free cash! Your first step is to set up an account with a platform which offers a Self-Invested Personal Pension (Sipp).
There are plenty to choose from and this website can help you find the right one. You should make your selection not just based on the cost (a fee is charged for holding your investments) but also on things like the research provided and how easy the website is to use.
When it comes to selecting investments, you can do your own research using the tools available on your own platform as well as plenty of other resources online. If you’re too daunted by the choice then you can use a recommended fund list that most platforms have — it’s a short list of well-regarded funds. But remember that past performance is no guide to the future.
Make sure you understand what you’re investing in and what risks you are willing to take. Those investing for the longest periods can afford to take more risk. This is a pension so you should take a longer-term view. Volatility and losses don’t matter in the short term because there is plenty of time for markets — and your fund value — to recover. However, the aim is for a well diversified spread of investments.
If you would prefer to enlist the help of a professional then you can find a financial adviser in your area using website unbiased.co.uk or vouchedfor.co.uk.
When it comes to the amount you should be putting aside, that’s up to you. Employed people see 8% of their earnings going into their retirement fund (a minimum of 3% from their employer and the rest from their own salary). Don’t forget to review your investment choices annually and increase your contributions when you can afford to do so and when your income rises —make a habit of paying a set percentage of your income into your pension, you’ll ensure that that your contributions grow alongside your income.
Your tax bill
When it comes to money for your income tax bill, putting money aside as you go along is the smart move. The stock market is no place for your tax money as it’s cash you can’t afford to risk. HMRC doesn’t offer discounts for those who have had bad luck in the markets.
When choosing a home for this cash, apart from finding somewhere safe, you’ll need to bear in mind that you’ll need access to the money twice a year to make your payments to the taxman — the self-employed pay in January and in July.
One option is to buy Premium Bonds from National Savings & Investments. As a Treasury-backed provider, your money is guaranteed – every penny. Rather than being paid interest, bondholders are entered into a monthly draw with the chance of winning tax-free prizes ranging from £25 to £1 million.
The ‘Premium Bond fund rate’ represents the return someone with average luck could get. At the moment this is 1.4%. But as numbers are randomly selected, there is a chance you could win big or, more likely, win nothing at all. Your money can be accessed within a working week.
Guaranteed returns
If you would prefer a guaranteed return you can consider a savings account. The rates at the moment are underwhelming so make sure your money is in a top paying account. You can get around 1.5% from some of the so-called challenger banks on an easy access account.
Alternatively, you could drip feed money into a regular saver account. The best paying accounts are at around 3% at the moment. You are limited to, typically, £250 a month. Since you need to commit to leaving the money there for a year you’ll need to have a separate pot you can access in six months.
An offset mortgage is another idea. This is a unique type of home loan, where savings are offset against the debt, with interest charged only on the difference.
You won’t earn interest on your savings using this option, but you will save money on your mortgage interest charges and the mortgage is paid off earlier as a result. You’ll still have access to your savings whenever you need them and can withdraw the cash when you need it.
You need to do some sums and see which option is right for you.
Good luck!
Do you have an investment or financial question for Holly? Send your questions to [email protected].
Photo by Brad Neathery on Unsplash
