Top 4 reasons why freelance parents need a pension

Many freelancers start working for themselves when they have little people. It makes sense - flexible working hours, being able to attend the school plays and not having to rely too heavily on one parent to do all the school drop offs and pickups. But the concept of saving money with children in tow is a tough one, particularly when you work for yourself. We know from our customers that pensions often don’t rank high in the priority list for freelancer parents and we want to break down why that needs to change.

Fast forward a number of years. You’re thinking about winding down your career, your children are all grown up and living their own lives. And it dawns on you that you’ve not been paying enough into your pension. By then, it’s of course too late. It really shouldn’t be like this.

After being left out of the government’s workplace pension scheme, freelancers are left to themselves to fund their own retirement. Everyone should have the rights to a comfortable retirement, especially after working a solid 40 years or so, and it shouldn’t be a ballache to set up! That’s why we partnered up with Bubele as part of their Let’s talk money edition, to help freelance parents avoid the future panic of not having enough in the pension pot. Our Co-founder Pete gave a talk for Bubele’s members about the top 4 reasons freelancer parents need a pension and we’ve recapped it below. 

1. The state pension is not enough, and it’s on you to save for retirement.

The new flat-rate state pension is currently £175.20 per week, or £9,110.40 a year, and this is only if you’ve made full national insurance contributions. Although your monthly outgoings will decrease as your mortgage may be paid off and you’ll no longer need to support the kids, this is not enough to live on for many people.

And unlike all your fully employed friends, whose companies enrolled them in a workplace auto-enrolment pension scheme to help flesh out the state pension, sadly, the self employed community are left to fend for themselves. Even though this sounds daunting, the government incentivises paying into a pension by paying you back the tax you’ve already paid…

2. The government will top up your pension contributions by a 25% contribution - tax relief...hurrah!

Although you may not have the luxury of an HR department to help sort out your pension, you do qualify for the government’s generous tax relief, which essentially pays back the tax you’ve already paid on that contribution.

For example, if you’re a basic-rate taxpayer, this means you will receive an extra £25 for every £100 you pay in. And, for higher-rate taxpayers, you can claim back a further £25 for every £100 you pay in, when you come to do your tax return.

This means that saving into a pension is very tax efficient, and the rate of return could be much higher than if you just put some money aside in your normal savings account. This could definitely be the case too if you started saving earlier...

3. ‘Compound interest’ is the magic ingredient to make your money grow, meaning you don’t have to save as much as you once thought...

The hardest, but most important thing to do is just to start as soon as possible. Start contributing with something as small as £10. The main reason to start early is the power of compounding.

Compounding means that you earn a return on your initial investment, as well as a return from previous years of investing, so the longer your money is invested the faster it could grow, and it keeps repeating this process to compound even further.

To put this into perspective, if you paid in a sum of £5,000 at age 20 into your pension and allowed for an average 5% growth each year, at 68 years old this could be worth around £54,841.75. Whereas, if you contributed this £5,000 at age 35, at 68 years old this could be worth just under half, at £25,945.80.

When you couple this with the extra tax top ups from the government: 🤯🤑🤯🤑

Although there are no guarantees when it comes to investing, starting as early as possible with just a small amount means you are saving yourself having to pay in larger sums of money, at a later date (with probably greater financial responsibilities). Trying to make up that extra £25,000 in the example above at age 50 seems impossible when you’re still paying your mortgage and supporting your children’s university tuition fees.

This shouldn’t be scary, but rather comforting that you can save a lot less money into your pension in the long run, if you save earlier.

4. Don’t be scared by the idea of ‘investing’. Pensions are a very very long term investment.

When we talk to parents about pensions, something that comes up a lot is that they’re put off just by the word ‘investing’. The negative connotations with ‘investing’ is holding many people back from setting up a pension, unnecessarily. Almost all pensions are ‘invested’ in some way, and investing is really just a word for trying to make your money work for you, rather than just sitting in a bank account, where it is not growing.

The biggest misconception is that investing is only for big investment bankers or stockbrokers. But really, investing is accessible and is for anyone who wants their money to grow! People with a pension aren’t labelled investors, even though technically their savings are invested. Therefore you shouldn’t be held back by the word ‘investing’, because it is part and parcel of a pension’s nature!

Pensions - as a long term savings account - are invested because historically speaking, money grows significantly faster if it is invested across the stock market for a long period of time. Over the last 100 years the stock market has gone up on average by 10% per year! Although there are ups and downs from year-to-year, money managers such as BlackRock try to reduce the effects of the downs, while still capturing as much as possible of the ups, through diversification.

Diversification means buying lots of different investments across the market, for example some in property, stocks and shares. That way, the chance of losing money on all of them in one year becomes much lower, so the gains from the winners are more than the losses from the losers. Penfold offers four different investment funds from BlackRock, where all are highly diversified, meaning that the level of risk is reduced.

Because pensions are a very very long term investment, any losses along the way can be made up over the years, and because of the greater returns you could earn on the whole by investing in the stock market, you shouldn’t be nervous about investing! In fact, the biggest mistake you can make is to NOT get started, since the earlier you start saving into a pension, the more time it has to grow and recover from investments. 

Hope these tips helped, but as always please get in touch at hello@getpenfold.com, or on our online chat for any questions you’ve got.