How do IT freelancers manage their pensions?

Before I answer the vital question of how IT freelancers manage their pension savings, it might be good to start with why to consider a self-employed pension in the first place, writes Angela James, founder of Yolo Wealth.

Circumstances matter with self-employed pension provision

You may have just started tech freelancing, which means you’ve left the security of your full-time position behind.

Or you might be a seasoned self-employed technologist, whose been working independently for a while now.

What do IT freelancers often call their pension?

Either way, there will come a time when you no longer want to be working; would like to slow down or retire, and spend your time doing the things you enjoy the most.

But you need significant retirement funds to do all that -- what’s known to most people as a ‘nest egg’, or in IT contractor terminology, a ‘warchest.’

Fail to plan, plan to fail

Most of us fail to deeply comprehend our financial needs for retirement. It’s hard to envisage how much we will need to support ourselves, and even harder to comprehend the scale of what we’ll need to have to produce the income required to be comfortable when employment ends.

The second mistake IT freelancers and others make? We all feel like retirement savings are something we can put off until tomorrow.

Many say, wrongly, ‘I have lots of time – building a pension can wait.’

Why IT freelancers pay the price for putting off pension saving

The issue with this approach is that what you will want -- and need -- will always be the same (insofar as neither will go away). All that happens by delaying is you make the challenge harder!

Think of retirement as a self-employed person in a similar way to buying a house. You will pay the same relevant price whether you buy it now or 15 years down the line.

The difference between the two is the number of years you will have to repay the mortgage -- buy the property now and maybe you get 30 years to pay it down.

Or wait 15 years, and you have only half the time!

A tech freelancer’s pension provision checklist

The latter approach ultimately means a higher mortgage payment, which in turn means you settle for something less expensive, and your retirement is no different.

Below, and exclusively for Free-Work, is my checklist to help IT freelancers assess, start and manage pension and retirement savings -- effectively.

Step 1: Start your pension saving plan with an Outgoings Review

A good place to start is to have an honest review of your outgoings and lifestyle expenses.

I say ‘honest’ because like all of us, IT freelancers tend to be good at minimising what they spend in reality!

So, run a thorough breakdown of all your fixed spends; look over your bank statements to see what all those ‘hidden’ spends are, and how they mount up.

Here, I’m talking about when you pop to the shops; have a coffee here and there, make a cash point withdrawal, buy that odd gift for a relative, and go for a workout at your country club.

Any comprehensive Outgoings Review factors in the Unexpected

Plus, factor in the unexpected into your Outgoings Review!

So your car breaking down; the £1,000 trip to the dentist, your Saturday night sit down on your reading glasses, and the boiler going bang in the depths of winter when only the premium call-out charger plumber will visit!

Next, invest some time thinking about what you enjoy doing and spending money on.

These are the Pleasure Spends. It could be your car; your home, foreign holidays, the theatre, golf, or more everyday things like having your nails done!

Two benefits of an Outgoings Review

Once you’ve examined all this (honestly), there will be two benefits.

You will have a better idea of a budget you could save for your future self, and;

You can exclude costs that will cease at retirement -- like mortgage, and life insurance for example, while including all the costs that you will take forward to retirement. Be aware, though, that some Pleasure Costs will likely increase after retirement!

Step 2: Tot up what you already have

Your next step is to figure out what you already have in the bank or elsewhere in savings.

For example, track down those pensions you may have accumulated from your permanent employment stints. Don’t forget, either, those private pensions you started but haven’t been consistent with.

Questions to ask as a self-employed person trying to start a retirement fund

Do you have other assets?
Do you have investments or maybe family-related plans which pay out?
Do you have property?
Are you thinking you might downsize later; and can you therefore include a potential windfall?

Unfortunately, the list of questions goes on – and these next few concern the state pension.

Will you have a full state pension?
What’s your state pension going to total?
What age will you get your state pension?
Is this age aligned with when you want to stop working?

If you have some (or any) figures in answer to any of the above, they provide a starting point to build upon.

Remember, ‘ticking along’ isn’t optimising…

You can explore what these income avenues or generators might provide towards your needs during retirement.

You should also try to understand, at this stage, if these avenues or generators are performing as well as they could be.

My tip here? It’s important not to leave investments and pensions merely ‘ticking along,’ because ‘ticking along’ is making do, not optimising!

You will need them to be working as hard as they can. This can be especially important if you had them for some time.

Markets, features, and benefits change and improve all the time, meaning what might have been the best when your ‘old’ plans started may no longer be the best available today.

Step 3: Calculate your budget (and include any compromises)

Now you’ve spent some time discovering the potential foundations of a nest egg/ war chest, plus your outgoings, you should know what your future ‘self’ needs to be comfortable in retirement.

Remember, if you’ve taken steps one and two properly, you know how much money you have, know how much money you spend, and you know what budget you can set aside for your future.

Step 3 is where you see if it all comes together.

Don’t be despondent if it doesn’t!

The majority of people will (at this point) need to make some compromises.

This might be that you simply don’t have enough budget. And that’s okay -- you do what you can, as doing something is better than doing nothing! As I have already pointed out, the task of pension provision won’t go away by doing nothing.

Contingency plans and compromises for tech freelancers who come up short

It might be you have a plan of action for now and next year only.

You might have to work a little longer than you wanted and retire a little later.

You might have to sacrifice some Pleasure Spends and simply not ‘do’ everything you desire.

Your contingency plans and compromises depend a lot on where you are in your professional freelance life.

You might be just starting out and know your income will increase in the future, meaning you can adapt your plan later.

You might be raising a young family, meaning a budget is more limited – at least at the moment.

The key at this point – if you’re coming up short in your pension provision as an IT freelancer, is to:

Do something;
Understand what you need;
Understand what achieving such a need will allow for;
Put a financial plan of action in place.

Step 4: Find the freelancer pensions to support you

Step 4 is about putting that financial plan of action in place.

This stage is where you consider what investment vehicles you might use for your allocated savings budget. It’s the wrapper or product you’re going to choose for your freelancer pension.

A good place to start if you’re self-employed is with a straightforward pension; it's not your only option but it offers many advantages.

Tax-free saving unique to pensions isn’t to be sniffed at

The main advantage of a pension is that HMRC -- the taxman -- will effectively help you save. That’s an offer all IT freelancers will find hard to turn down!

Pensions offer you tax relief at your highest rate of tax, so if you are a higher rate or super rate taxpayer, then that’s how much relief you will get.

For example, if you’re a higher-rate taxpayer paying the 40% rate, you will get 40% tax relief allotted to your pension. You will make 60% of the desired contribution to the pension and HMRC will top it up, with a further 40%.

Put another way, and in simple terms, you will pay no income tax on every £1 you save into a pension.

There are some overall limits and allowances for pensions which you should check out.

But, depending on your circumstances as a contract technology worker, you may be able to save up to 100% of your earned income -- or £60,000, whichever is the higher.

This means for every £100 you could afford to save, the cost to you is only £60 -- if you are higher rate taxpayer paying tax to HMRC at 40%.

Mind the pensions (knowledge) gap

When it comes to choosing the right pension, this can be difficult if you don’t have a lot of knowledge about pensions, savings products, and the investment market.

By their nature, a pension is a complicated investment product.

That said, you may have already heard of some key types of pension, such as a:

Stakeholder Pension;
Self-Invested Personal Pension (SIPP);
Personal pension;
Group pension.

All four will offer you your tax relief, but the differences will come in the features they offer, such as things like:

investment choices;
contribution flexibility;
how and where the money might be paid if you died prematurely
price; and;
how you take the income from the pension when you retire.

As a freelancer, flexibility will be one of your top priorities when selecting a pension and provider.

You will want to have a lot of flexibility over your contribution options.

You may need to vary the contributions from time to time; take breaks in your savings, make employer contributions from a limited company, or/and make salary sacrifice contributions directly from your umbrella company.

To make them efficiently and compliantly, these contributions must not be taken lightly!

And that brings me neatly to the next stage on the checklist; get advice.

Step 5: Get advice

Your retirement will be the biggest investment you will ever make. It's one of the most important events you will ever need to plan for, and you will do this over perhaps many decades.

We all utilise the expertise of others throughout our lives and advice is worth considering for something as important as your nest egg or war chest.

Taking advice from an expert is especially worth considering if you are very busy with work; your family or your personal life.

What can a financial adviser do that I can’t?

A financial adviser can not only help you make the right decisions but can take the time and pain out of the task too.

You should try to find an adviser who will work with you on all of the above four steps.

Ideally possessing a good understanding of how freelancers, contractors and the self-employed operate, the adviser you want to enlist should be able to analyse and make the most of what you already have saved, while making recommendations on the products and financial plan you need to put in place to meet your financial needs in retirement.

The best sort of financial adviser (and I hope I’m one of them!), can save you time, give you confidence and keep you focused on the end goal -- with helpful nudges and timely prompts along the way!

Step 6: Review your progress

Last but not least if you truly want to manage your pensions and retirement planning as an IT freelancer, it’s best to check-in.

In short, to ensure you meet your future needs, maximise your tax allowances and optimise your pension, you must periodically review your progress.

Remember, you wouldn’t take out a 25-year mortgage and never review your rate again! Instead, you’d check-in, so that you always have the lowest and most competitive or suitable rate for your circumstances.

Your pensions are no different.

Review, check-in on the plan, and go over your investment at key intervals.

Final recommendations

Crucially, look at what’s changed in your circumstances; what’s changed in your goals and what’s changed either in the markets or under the government.

Redefine, adapt anything to maximise your pension savings and roll again until the next check-in and ideally, not alone, but with an expert who can help you build your nest egg until you need to access it and beyond.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

How do IT freelancers manage their pension savings?