Retirement planning for founders and freelancers

Self-employed freelancers and business owners can come from all walks of life and varying industries, but they have at least one thing in common: no boss is providing a pension plan for them.

Trying to save up for retirement can feel like an uphill battle, but if you’re self-employed, then it’s vital to get the foundations sorted before you’re old and grey. As the ancient Chinese proverb goes, the best time to plant a tree was twenty years ago - the second-best time is now.

If you’re a freelancer or founder without a clue where to start, we’ve put together a quick guide on the basics of retirement planning to help you on your way.

Why bother with retirement planning?

Live for the now, carpe diem, YOLO - right? That might have worked to convince yourself that last drink wasn’t a bad idea on Saturday night, but planning for retirement is a whole different ball game.

The Institute of Fiscal Studies found that private pension participation rates have fallen from 33% in 2005-06 to 14% in 2014-15 among long-term self-employed people. That’s compared to 81% of private sector employees saving into a workplace pension between 2020-21.

Not to mention, we face an ageing population crisis. In the next 25 years, the number of people older than 85 will double to 2.6 million - and there aren’t enough state resources to finance the health and social care sector. That’s why planning ahead for your retirement is more critical than ever.

Understanding your pension plan options

Without the luxury of employer-sponsored pension plans, you must take your future into your own hands. There are several different pension options you can choose one or several of to save for your retirement.

State pension

Almost everyone gets a state pension, a regular government payment to claim when you reach state pension age.

National Insurance contributions are your ticket to the State Pension, and the amount you receive will depend on how many years you've contributed. Sounds great, right? Unfortunately, it’s usually not enough to live off of.

Personal pension plans

A personal pension plan is a defined contribution plan - pretty much like what an employer would provide for you, but you’re in control of how much and often you contribute. 

How much money you have for retirement depends on how well the investment performs throughout the years. Depending on your preferences, you can switch these asset allocations up with some providers, so research the best pension plan to suit your needs.

SIPPs

A Self-Invested Personal Pension (SIPP) gives you more control over the types of assets your money invests in, including stocks, bonds and property. The flexibility means you can tailor your investments to your risk tolerance and financial goals.

Setting up a SIPP involves choosing a provider, opening an account, and contributing regularly. You'll also need to select your investments, either by yourself or with the help of a financial advisor.

Tax considerations for retirement planning

Ensuring your pension is tax efficient is where the magic happens. Understanding how your pension contributions and withdrawals are taxed can have a bumper impact on your retirement planning.

Tax relief on pension contributions

The government really wants people to pay into their pensions, so to sweeten the deal, tax relief is available when you contribute money to one. Did anyone say free money?!

It works by the government effectively refunding the income tax you’ve paid on that pension money - if you’re a basic rate taxpayer, for every £80 you contribute, the government adds £20, making the total contribution £100.

Unfortunately, that bonus cash has its limits. The annual allowance for tax relief on pension contributions is currently £40,000 - after that, you’ll pay full tax on your contribution. 

For freelancers and founders, the ‘carry forward’ rule - where if you haven’t used up your annual allowance in the last three tax years, you can carry forward the unused allowance to the current tax year. This is great for those who can’t always predict their monthly income.

Tax on pension withdrawals

In the UK, you can usually take 25% of your pension pot tax-free once you reach the age of 55. The remaining 75% is taxed as income, so you should plan your withdrawals accordingly.

If you’ve got any alternative assets you’ve been holding onto for retirement, like a property portfolio, you may have to pay Capital Gains Tax (CGT). Each individual has an annual tax-free allowance, known as the "annual exempt amount." Any gains above this amount are subject to CGT. Then there’s inheritance tax to consider as well if you want to pass on any assets to friends and family.

Wrapping up

Planning ahead for founders and freelancers is absolutely crucial. When it comes to retirement planning, the time will pass either way - so why not have your options sorted now so you can relax and enjoy your golden years?

If you’re in need of some advice on where to start or want to know how you can make your retirement as tax-efficient as possible, BXD Accounting is here to help - get in touch for a free initial consultation.