Are you in the 82% who haven’t arranged their freelancer pension?

Just 18% are currently paying into their freelancer pension pots, compared to 48% of employees.

This is understandable. While employees will have their pension scheme arranged by their employer (including deducting PAYE contributions), you’ll need to set aside the time to carry out all the admin involved in setting up a freelancer pension scheme.

But, the benefits are well worth it. And, with expert accountancy support, the process might not be as tricky as you expected.

Why is a freelancer pension so important?

The state pension currently enables retired freelancers to claim a maximum of £155.65 per week (equivalent to just over £8,000 per year).

This amount can make a real difference, but is unlikely to enable you to sustain a comfortable standard of living well into old age.

Judging by recent trends, this amount looks set to continue decreasing over time, while the age at which state pension can be claimed will be pushed back further.

So, you’ll need a backup option. And, fortunately, freelancer pensions come with their own set of benefits:

Managed risk

A good pension plan will be managed by skilled investment managers, who mitigate risk by diversifying the assets your pension is invested into.

Tax relief

The government will pay a standard rate of 20% on top of every pound you put into your pension (equivalent to £2,000 on £8,000 of payments). Higher rate taxpayers can also claim an additional 20 – 25% via their self-assessment tax return.

Inheritance

Unless your total pension is worth more than £1m, your chosen beneficiary will receive your pension as a lump sum with no inheritance tax requirements should you pass away before turning 75.

Options

After the age of 55, you can withdraw up to 25% of your pension tax free if you choose. You can then withdraw the remainder at the current tax rate.

How to set up a freelancer pension

1.      Recoup previous pensions

Find old pension schemes by contacting your old employer, or using the government’s ‘Pension Tracing Service’. If the terms aren’t beneficial, you can usually transfer it into another scheme.

2.      Choosing a scheme

Check the market for competitive plans, then decide whether you’d prefer to re-start contributions to a scheme you’ve joined previously or move to a new scheme.

If you choose to set up a new pension, you’ll have three options:

• Personal pension
• Self-invested personal pension (SIPP)
• Stakeholder pension

The amount you receive on retirement will depend on how much you’ve paid in, and how well your investments have paid in.

3.      Making pension payments

Decide on how much to pay in based on:

• How much you intend to live off during retirement
• The number of years left until you retire

Freelancers with a regular income tend to pay in approximately 15% of pre-tax income. If you’re on an irregular income, set up an ad hoc payment scheme that adds up to roughly this amount.

Monitor the performance of your pension scheme over time. If it doesn’t generate the promised results, or a more competitive offer emerges elsewhere, consider switching your provider.

Call on 3 Wise Bears for accountancy and tax advice on freelancer pensions.