Pensions for Freelancers
When you're young, pensions are the last thing on your mind, but actually, the earlier you start to save for your retirement, the more financial security you will have in later life. Even Freelancers need to retire!
For those in employment, your employer usually takes care of your pension, and will often match your contributions. If you've moved jobs, you may have several pension pots, and consolidating them may be worth considering.
There are significant tax advantages to paying in to a pension, as they are usually tax deductable. (laws may vary in different countries)
There are several ways to provide for your pension, and you can read more about them here: UK / South Africa
There is a lot of advice and information available, and as always with any major investment, you should seek professional advice.
In this blog, I am going to look at one potential solution, which is the one I have opted for. It may not be suitable for everyone, and will require some work if you choose this option.
Self Invested Personal Pension (SIPP)
Essentially, this is a system where you invest money in the stock exchange (which is what most pensions do on your behalf) AJ Bell, the platform I use defines them as: A SIPP, or self-invested personal pension, is a type of personal pension
that gives you a much greater degree of freedom than any other pension.
You're in complete control of how and where your money is invested, and
make the decisions that determine how your pension pot performs. The
value of investments can change, of course, so remember that you could
lose money as well as make it.
I was able to transfer my pensions from previous employers, and then select a range of stocks and funds to invest in, and I am steadily building up my pension fund through buying and selling, and through dividend payments.
The fund follows the usual pension rules, and you can not draw from it until you reach retirement age.
Advantages:
- This is a very flexible system, and you have full control of your investments
- You can use a SIPP to consolidate existing pensions
- It is simple and easy to set up
- You can set up a monthly direct debit, and then invest the money.
- I like the AJ Bell platform, because it offers a wealth of information that you can use to make your transfers
- I have been able to invest in foreign and local markets, and in a range of services and commodities, to minimise risk. I have selected some shares that offer dividends, and others that I will use to sell and make money on the sale.
- The entire pension is part of my assets, and on my death, will be left to a member of my family, who will be able to continue it or cash it in.
- if you are not confident picking your own stocks, then there are funds you can choose from, which invest on your behalf.
- Pension systems are seeing significant change, and many people are finding that they will not receive the pension they expected, and in some cases, the pension funds have disappeared with the collapse of companies.
Disadvantages
- The value of your investments change constantly - there is no guaranteed final pay out. There is risk, but there is also the opportunity to increase your income.
- Share prices go up and down, and there have been market crashes. The markets do generally recover, but it takes years.
- You do need to learn about the stock market, and how to pick stocks. I like the AJ Bell platform because you can see balance sheets, company information, market news, and because they offer a range of investment tools and information, including webinars.
- It's helpful to be able to read a balance sheet, so you can see whether a company is profitable, or mired in debt.
- You don't have a guaranteed monthly payment.
I need to be clear that I am not promoting this as the only option, but simply saying it is an option, and the one that I am using. Should you wish to pursue any pension, you should seek independent financial advice.
Whatever you do, as a freelancer, make sure you plan for your pension, so that you can retire one day!