Skip to main content

What should a contractor consider when saving for retirement?

Published on: 9 Nov 2017

What should a contractor consider when saving for retirement?

Saving for retirement as a contractor requires significant planning and shrewd budgeting, but it is not as challenging as many self-employed professionals may fear.

The main issue is that many have not considered retirement, with research from Aegon showing that only 44 per cent of the UK’s freelancers and contractors have a plan in place when saving for retirement.

However, while no company pension is available for freelancers, there are a few different options to help them save their cash and hold enough money for when they stop working. Here are some of the best ways to keep hold of your money:

1. PERSONAL PENSIONS

Many self-employed individuals decide to use personal pensions when saving for retirement, allowing professionals to choose where they want contributions to be invested from a variety of funds made available by the provider.

The provider will also claim tax relief at the basic rate of tax for you, adding this amount to your overall pension savings. Typically, ordinary personal pensions are available along with stakeholder pensions (where the maximum charge is capped at 1.5 per cent), and self-invested personal pensions (these offer more investment options but often come with higher charges).

2. INDIVIDUAL SAVINGS ACCOUNTS (ISAS)

ISAs allow contractors to save up to £15,000 tax-free every year and are available by most financial institutions.

There are typically two types of ISA that can be used by self-employed professionals. The first is cash ISAs, which have a variable rate of interest and can be accessed instantly. Some have a higher rate over a fixed term, while others introduce penalties for early withdrawal.

Secondly, equity ISAs are another option. They can perform very well over the long term but rely on the performance of financial markets, which brings an element of risk. Contractors also have total freedom over how much they invest in each type of ISA, meaning they can put their money in equities, cash or a combination of the two.

3. LIFETIME ISAS

A new initiative rolled out by the government earlier this year, Lifetime ISAs are designed to encourage people between the ages of 18 and 39 to save money.

Up to £4,000 can be saved yearly until the age of 50 and there is a 25 per cent government bonus on all contributions. The money within the Lifetime ISA can then be accessed to buy your first home worth less than £450,000, or once you reach the age of 60, or if you become terminally ill.

However, using the money for anything else will incur a 25 per cent penalty on each withdrawal, which will be unappealing to those hoping to use the savings in other circumstances.

We understand that there are a lot of processes that need to be put in place when thinking of retiring, especially when being self-employed, but by getting advice from professionals like Brookson can help make this procedure a lot easier and less stressful. Brookson offer a number of services to support you throughout you career, as well as making your journey to retirement simpler.

For further information, get in touch with Brookson on 0800 230 0213