Being self-employed can offer many advantages, but it also brings unique challenges – especially when it comes to saving for the future. Without the safety net of employer provided benefits, self-employed individuals must take a proactive approach to financial planning.
Challenges faced by self-employed individuals
There are a number of challenges that you may face as a self-employed person that can make saving for the future difficult.
No auto-enrolment
Unlike employees who are auto-enrolled in employer sponsored pensions, self-employed individuals must establish their own retirement plans, requiring additional effort and financial discipline. They also don’t benefit from an employer paying into their pension on a monthly basis.
Irregular income
Income fluctuations make it challenging to plan and adhere to a consistent savings schedule. This unpredictability necessitates a flexible yet disciplined approach to managing finances.
Higher expenses
Operating a business often incurs higher expenses than those faced by employees, with business-related costs reducing the amount of income available for personal savings. This situation is further complicated by the need to regularly set aside funds for tax payments.
Gaps in National Insurance contributions
Self-employed individuals may experience gaps in their National Insurance contributions, potentially affecting their state pension entitlement.
A financial planner can serve as a crucial support system to navigate these various challenges. In many ways, acting as a replacement for the financial guidance and benefits typically provided by an employer, helping to structure a robust savings and retirement strategy.
Strategies for building a robust savings plan
The following approaches can help you build a robust strategy tailored to the unique demands of self-employment.
Build an emergency fund
Your first priority should be establishing an emergency fund with readily accessible cash savings to cover periods of poor cash flow. This safety net could enable you to continue contributing to pensions and other savings during financial downturns.
Integrate savings into business cash flow
Aim to “pay yourself first” by setting aside savings monthly. If your income is variable, then begin with a modest amount and then review regularly with the aim of increasing over time. Saving more when your income is higher can help to build a safety net for lower earning periods.
Pension contributions
Tax relief on pension contributions at your marginal tax rate can significantly enhance the growth of your savings by allowing you to reclaim some of the tax paid on your income. This means that each contribution you make to your pension is effectively boosted by the amount of tax relief you receive, enabling you to build up your retirement savings more quickly and efficiently.
If you transition to a limited company, you can make employer contributions to your pension, which is a highly efficient way of building your retirement savings and can also reduce your corporation tax liability, as these contributions are considered a business expense.
Invest within an ISA
Individual Savings Accounts (ISAs) provide a tax-efficient way to save and hold investments, despite the lack of tax relief on contributions. The primary benefit is the flexibility to access funds before retirement if needed for cash flow purposes. Having both pension and non-pension savings gives you ultimate flexibility if your plans change in the future.
Maintain National Insurance contributions
Consult with a financial planner or accountant to ensure you are paying sufficient National Insurance contributions to maximise your state pension entitlement each year.
You may also wish to consider filling in any gaps from previous tax years on a periodic basis. You can normally go back six years to fill gaps, but there remains a short window to go back all the way to 2006.
Income protection insurance
Setting up an income protection policy can ensure your expenses will still be met if you are unable to work due to illness or injury. This can also allow you to maintain regular pension contributions during such periods, ensuring that your retirement goals are not compromised.
You can find out more about how to financially protect yourself, and family in our updated guide.
Working with a financial planner
A financial planner can help determine how much you need to save for retirement, setting a clear savings goal. This guidance helps you understand the amount you need to save regularly and account for in your business cash flow.
Planners can also advise on suitable pensions, ISAs, and insurance policies, along with an appropriate investment strategy to grow your savings tax-efficiently over the long term.
Incorporating these strategies into your business model and financial plan can help you navigate the complexities of self-employment, ensuring that you not only manage immediate expenses but also build a robust savings and retirement fund for the future.
If you are self-employed and need financial, legal or tax advice, you can contact our team.
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
If you are unsure about the suitability of otherwise of any product or service, we recommend that you seek professional advice.
