Launching your own business is about starting something new and fresh. It’s very much a beginning, so the idea of bringing it all to a close and retiring is probably about the furthest thing from your mind. However, as we found out when we chatted with Alex Caulder – an expert on pensions for freelancers – it’s very much something worth thing about now.
Not only will it serve you well in the long run, there are also tax-related benefits that you ought to know about. In the following interview, Alex talks through everything you need to know.
Do you find that a lot of self-employed people aren’t very clued-up in this area – that they don’t know very much about pensions for freelancers?
It’s mixed, I think. You get some people that realise they should be doing it but have done very little, and you get some quite clued-up individuals who know what they want, what they’re doing and what they’ve got already. Must people need a little nudge to make them aware how tax efficient pensions for freelancers or contractors can be.
The key thing with a pension, really, is that a director’s pension is classified as a business expense, so it can come off your top line before it’s taxed on your bottom line. It’s very simply the most tax-efficient way you can get money out of your limited company and into your personal name, even though it’ll be locked away until your chosen retirement age.
Is this a new thing, or has this always been the case?
No, pensions for freelancers are not a new thing. However, the rules have been changed significantly to improve them. There are a few key things. Historically, if you were the director of your own company, a 100% share owner and you wanted to set up a pension, it used to be the case that it had to be in the limited company’s name.
That was the old Executive Pension Scheme. Now, they weren’t bad schemes or anything, but when you shut down your limited company you still had this pension in Acme Ltd, or what your company’s name was. When you set up a new limited company, of course, you had to set up a new pension. They were a little bit inflexible.
These days, it may be paid from Acme Ltd, but it’s in your personal name. It doesn’t matter what you do work-wise, whether you’re a sole trader, a limited company or a permanent staff member, that pension is in your personal name and will carry with you whatever you decide to do.
So, how do pensions for freelancers work? Let’s say you were talking to a freelancer or contractor working as a limited company. Would you recommend that they put a certain percentage of each month’s takings aside?
It’s difficult to answer that because there’s no set figure. The reason, of course, is to do with their age, their income and their goals. So, there might be someone who starts a pension late in life, and to really make it worthwhile they have to set aside a considerable sum.
t might be someone who is 25 years old and has plenty of years to save up, and they’d be looking at a more reasonable sum. It’s a difficult figure to summarise. It’s rarely calculated as a percentage.
It’s more that you will decide you need to retire with, say, £500,000 – perhaps an income of £30,000 per year – and then we work backwards from that.
When you talk about people starting a pension “late in life”, what would you consider that age to be?
I guess around 40-45, that kind of age range. The ideal age is around 30, but the earlier the better. Some people start at 20 or 25. The majority of people tend to get serious about it at 30, and that still gives you plenty of time – around 30 years to save and invest.
As long as you do it sensibly you can achieve your goals. Post that, say around 40, it’s still achievable but you’ve really got to hammer it home if you’ve got no previous pension schemes deferred from an earlier employer.
In your role, what do you do with the money that your clients put into their pension pot? How do you grow it for them?
Let’s say someone saves £1,000 per month into their pension scheme. To begin with, we ask them, “what is your attitude to risk?” They tell us it’s either low, medium or high. Once we’ve assessed that, we can profile them and say, for example, they’re a medium-risk investor looking for growth.
What we then do is invest the money across, say, seven different fund managers and they would be investing in different sectors to offer some diversification. Each fund manager across each fund may invest in 200 shares, maybe 300 shares, and the growth then is accumulated based on the performance of those shares and funds.
Let’s take the worst case scenario. You have someone who decides never to invest in a freelance pension scheme. What will they get at the end of their working life?
If they do nothing, then they’ll be relying on the State Pension – the Old Age Pension as people used to call it. That’s now being deferred, depending on your age. It’s going back to 67 and will be 70 in a few years time.
People who are 45 years old now will be able to withdraw a State Pension at 65, broadly speaking, but the majority of contractors or freelancers looking at a State Pension now will receive it at 67, and as I said, that’s being knocked back as time goes on.
How much is the State Pension currently?
Approximately £500 per month, which wouldn’t be enough for anyone, but it does vary depending on certain criteria. There’s also a second State Pension which is based on your National Insurance contributions, so that can be used to top up your Old Age Pension.
So the downsides of not taking up a freelance pension scheme are that you would be getting very little money and you’d be doing yourself out of certain tax benefits?
Correct. The huge advantages of doing a freelance pension are, firstly, that you’re taking money out of your limited company and into your personal name in an incredibly tax-efficient manner. You’re also getting equity growth on the capital that you’re investing. We can’t guarantee growth rates, of course, but they far out-perform deposit accounts.
If someone wants to talk to you about pensions for freelancers, how can they get in touch with you?
I’m not employed by My Accountant Friend, but I have worked with them on many occasions. I’m a partner of a company called St James’s Place Wealth Management. So people contact me through their MAF accountant, or directly through my website and I’d be delighted to talk to them.
To discuss pensions for freelancers and contractors with Alex Caulder, take a look at his website (www.alexcaulder.co.uk) or call him on 01442 252058.