Whilst to many retirement will still seem a long way off, by the time we get to 40 we will only have 240 “pay days” left before we reach 60. A cruel reality of what is known in investment circles as “compound growth” means that the earlier we start saving, the higher our pension income is likely to be.
Here, Angela James, associate director at freelancer financial planner Contractor Wealth, highlights ten of the top freelancer pension myths and explains why they are not always true.
I can always catch up with my pension later
No, you can’t always catch up. Everyone can invest a certain amount each year tax-free, and allowances can be carried forward. But if you delay or miss out several year’s contributions, the reliefs may not always be available and you have to meet certain eligibility criteria.
It is important to invest monthly and buy into the investment at fluctuating prices – if you don’t, you will not only lose out on growing your pension pot but also on the fluctuating market conditions that could build a bigger pot over the longer term.
Any amount, no matter how small, instantly grows in value as a result of the government’s tax relief on pension contributions. Early on in their careers, freelancers can made modest contributions to start with, increasing them as their earnings increase.
I only need a pension to fund my retirement
Freelancers need to think about both the income they will need and their tax position post-retirement. What is the point of being tax efficient saving into a pension fund only to become a higher rate taxpayer (HRT) following retirement, or being penalised with a lifetime allowance charge (LTA)?
For many freelancers, it is a combination of investments, of which a pension is only one part, which may best suit their needs. Non-pension funds can also be accessed pre-retirement age, so a freelancer may wish to have relatively liquid assets as well as a pension.
Pensions and tax planning go hand-in-hand, and a freelancer needs professional advice on both.
My lifestyle costs will fall when I retire
Not true. Most freelancers’ lifestyles become even more expensive when they retire because retired freelancers have so much more time on their hands, and they tend to fill it with expensive hobbies and holidays. Freelancers should plan to have more disposable income on retirement, and a well-funded pension underpins this.
Pension funds lose money
This is one of the biggest pension myths. All investments can lose money but all investments can also make money.
That’s nothing to do with whether it is a pension investment, although freelancers should always check the provider’s fees, as if they have a small balance with lots of costs that could erode the value over the long-term.
The key thing about any investment, pension or otherwise, is to monitor how the money is invested. It is common for freelancers to take out a pension and forget all about it, assuming what was right then is still appropriate 20 years later.
Self-investing my pension will make it grow faster
Some freelancers believe that making their own investment decisions make their funds grow faster. But the key aspect is monitoring, and a good financial adviser will be able to do this better than a freelancer because the adviser has access to the tools, skills and people, as well as access to certain funds, that an individual investor won’t have access to.
Annuities are no longer available
Annuities are still a valid option for those who need a secure income at retirement and not only are annuities still with us – because of the reforms of 2015 – annuities are actually improving to include new features and options to stay competitive.
I can only buy an annuity
This is a very outdated view – freelancers have much broader options on retirement than in years past. This may be the only option that a freelancer originally signed-up to. A financial adviser can provide information about alternatives to an annuity and how to access them.
However freelancers would be wise to note that some providers have yet to embrace the pension reforms of 2015 and not all providers are allowing flexible access drawdown, for example.
Annuities are poor value
This is largely a perception rather than a fact as you are paying for a level of security with an annuity. If a freelancer does not have significant assets on retirement and needs to secure an income, then an annuity is a valuable option for that individual.
With an annuity, depending on the options chosen, you are paying someone else to manage your money that will continue to pay a set income, which can be index linked to increase with inflation for as long as you live, which could be 15 years or 35 years. So, it can represent excellent value for some.
I can take all my pension pot as a tax-free cash lump sum
This is one of the fastest growing pension myths since the reforms of 2015. A freelancer can draw down 25 per cent of their pension fund as a tax-free lump sum. The 2015 reforms also allow freelancers to access their entire fund, assuming the scheme provider allows it, but it will be taxed at the freelancer’s marginal rate.
My family won’t get my pension savings if I die
Family members do benefit financially from a freelancer’s pension savings. If a freelancer dies before retirement, then the fund is paid to the freelancer’s beneficiaries as a tax-free lump sum.
And if a freelancer dies very soon after retirement, there are cases when the beneficiaries of the freelancer’s estate may also receive the value of the pension fund, although it would be subject to tax.
To sum up, freelancers can start a pension at any age and the sooner they have that conversation with a financial adviser, the better. The rules are simple – if you save well then you receive a better level of income during retirement. If you don’t save well, then you can expect a poor income in retirement.
Angela James is Associate Director at Contractor Wealth, which specialises in financial planning for freelancers, contractors and the self-employed
Thinking of changing career after retiring? Find how to get on the ladder and become a property developer
Sign up to our newsletter to get the latest from Business Advice.