Seven tips to save for retirement when you’re self-employed

Making the decision to become a freelance journalist was a daunting one. Would enough people commission me? Could I match my previous earnings and would working from home all day every day drive me nuts?

Thankfully I’ve lucked out. I earn more now that I’m self-employed and working from home hasn’t driven me insane…yet. WhatsApp group chats have replaced the water-cooler banter, I pop out for a coffee when I can and I’ve usually got two ridiculously cute dogs at my feet, pestering me to take them for a walk.

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What I wasn’t prepared for, however, was the challenge of saving for retirement, once you become self-employed.

We don’t get signed up to a workplace pension automatically, nor do we have an employer that’s legally obliged to pay into our pot. Unless we want to work ourselves into the grave, we need to take responsibility for our future finances and get saving.

But given the lack of support from either an employer or the government, it’s hardly surprising that current estimates suggest that only one in five self-employed workers pay into a pension.

As a pension writer, of course, I don’t have any excuses. My work routinely reminds me of the need to save.

My plans aren’t perfect and it’s not been easy, but I’ve been doggedly determined. Here are seven lessons I’ve learnt along the way:

1) Make retirement plans a business priority

The power of compounding means that the sooner you start saving, the less you’ll need to save overall.

So, don’t put saving on your to-do list or wait for your business to pick up. Your retirement saving needs to be an integral part of your business finances and unless you strike while the iron is hot, you’ll always find an excuse to keep it on the back burner.

My biggest financial regret is that I chose not to pay into a relatively generous workplace pension in my first proper job. Twenty-two-year-old me thought I couldn’t afford it – even though I was still living at home. But given I stayed in that job for three or four years, my retirement income has undoubtedly taken a hit as a result.

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I was determined not to make the same mistake twice so made retirement saving a priority as soon as I went freelance.

2) Choose the right wrapper

I already had a self-invested personal pension (SIPP), so thankfully I was good to go as soon as I started my business.

SIPPs are ideal for self-employed workers: you can decide how much you want to pay in and when, with access to a broad range of investments.

Just be sure to shop around for the right platform, keeping a close eye on charges. Percentage charges might look low, but they’re like a tax on your pot - the bigger it grows, the more you pay. Low flat fees mean your costs won’t change.

Some self-employed people do prefer the flexibility of individual savings accounts (ISA). You don’t need to tie your money up (you can’t access pensions until you’re 55, rising to 57 in 2028) and all your withdrawals will be tax-free.

• Is an ISA the missing part in your retirement plans?

That’s quite a selling point when it comes to retirement income, but your savings are likely to grow faster if you invest in a pension. That’s because you get tax relief on your contributions, equivalent to the rate of income tax that you pay, which, compounded over time, is likely to outweigh the benefit of tax-free withdrawals.

You can take 25% of your pension tax-free, the rest is taxable. However, lots of people will pay a lower rate of tax once they’ve retired.

3) Don’t worry about being an expert investor

There’s no default fund with a SIPP, so you will need to decide where to invest yourself.

The sheer quantity of options can be overwhelming if you’ve not invested before, but it shouldn’t put you off. Most platforms offer expert guidance and you can choose one well-diversified core fund, rather than building a portfolio with multiple holdings.

You might also be able to pay into a managed SIPP – giving you access to a pre-selected portfolio of investments, based on your goals and attitude to risk.

When I started investing 20 or so years ago I regularly researched funds as part of my job and felt confident choosing actively managed options. As time has passed, I’ve gradually moved towards simple index funds.

They’re cheaper, don’t require as much research or monitoring and are all performing nicely.

• How much help do you need when investing?

It’s far better to get investing in a solid, reliable fund ASAP, than let worry over picking the “best” performer put you off.

Retirement saving shouldn’t be competitive sport, or require financial expertise.

4) Decide how much money to contribute

You can invest 100% of your earnings into pensions, up to a maximum of £60,000 a year.

That’s a pipe dream for me and many self-employed workers. Nonetheless it’s best to pay in what you can, whenever you can.

It’s also easier said than done when your income varies from one month to the next, so I set up a cautious direct debit when I first started. I wanted to ensure money was going in every month, but didn’t want to worry about going overdrawn if I hadn’t had much work.

• When will you get your state pension?

When you use a workplace pension, your contributions will be a percentage of your salary, which means you’ll pay more in every time you get a pay rise.

Self-employed people though, will normally just pay a fixed amount. That means it’s a good idea to regularly review monthly contributions and increase them whenever you can.

5) Make top-up payments too

Even though I’ve increased my pension contributions since I first started, I’m conscious that I’m still not paying in as much as I should. Without the benefit of employer contributions, I also know that I am paying in less than I would on a workplace scheme.

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So, hard as it is, I try to pay lump sums in as and when my cash flow allows. Completing my annual tax-return – where I see exactly how much (or how little) I’ve paid into pension that year - provides me with the nudge I need and reminds me that topping up my pot will also lower my tax bill.

If I’ve had a good month, I also try to reward my SIPP with a little bonus too.

6) Consolidate your pensions

Since going freelance I have also transferred an older workplace pension into my SIPP. As the charges on my SIPP are lower, the switch continues to save me a fortune in fees.

• Five reasons to consolidate your pensions and three to think twice

But I also like the fact that my retirement savings are all in one place. I just need to log on to one account to see how much I have saved, review performance and – if I need to – make changes.

7) Keep money in different ‘buckets’

In addition to contributing into a SIPP, I’ve also continued to pay into a stocks & shares ISA, which I’ve earmarked as my mid-life or pre-retirement “bucket”.

It’s not a period of life that I had previously given much attention to. But with university costs rising, not to mention a graduate jobs crisis and parents that may need care, I’m starting to think they could be tricky years to navigate.

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Although I will be able to take money out of my SIPP from age 57, I don’t want to raid my pot until I’m properly retired. Our ISAs should hopefully give us a bit more financial wiggle room during those years.

We’ve also got an emergency savings bucket in easy-to-access cash, so that our ISAs and pensions don’t have to take a hit when we get a surprise bill (like a £2,500 dental bill this month!).