Saving for retirement as an independent business contractor

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Photo by Aaron Burden on Unsplash

Freelancing is becoming an increasingly popular way to work among young people because of its obvious advantages. According to statistics, there are 1.57 billion freelancers in the world today, or just under 47% of all employed people. The global market is currently worth $1.5 trillion and growing at a 15% CAGR.

Pension plans are one feature that distinguishes freelancing from regular work. According to 27% of freelancers, the main disadvantage of freelancing is the lack of retirement benefits. Normally, companies sign up their workers for a pension scheme, whereas freelancers, if they must receive any pension, must work it out themselves.

A retirement plan can never be started too soon. But freelancers typically put it off until it is too late, which creates a problem in the long run.

This is our quick guide to pensions for freelancers thinking about securing their financial future.

Are freelancers eligible for state pension?

Pensions are not automatically available to freelancers. They may, however, be eligible if they meet the requirements of the country in which they reside. For instance, in the UK, self-employed people can only receive a state pension if they have made timely national insurance contributions for a sustained period of time. In the United States, freelancers contribute to their pensions through systems like the Simplified Employee Pension IRA and the solo 401(k). Nearly every other country has structures that allow workers to save a portion of their earnings for the future.

The problem is that the pensions provided by state arrangements are insufficient to support a comfortable lifestyle in old age. As a result, freelancers frequently set up alternative private pensions or increase security to supplement meager state pensions.

Why should freelancers pay into a pension scheme?

A private pension plan, as we previously stated, is a freelancer's escape from old-age poverty. Since the state retirement age is on the high side and many people do not want to work that long, a private pension scheme also benefits those who want an early retirement. Another upside to paying into a retirement account is that freelancers are allowed to make pretax deductions, lowering their overall taxable income.

Pensions are a complex matter, and there are many different types of pension schemes to choose from. Therefore, freelancers should pay into a pension plan that works well with their current income and projected lifestyle in their later years.

How do I choose the right freelancer pension?

In choosing the best pension plan, freelancers often consult with their banks or financial advisors. Expert advice greatly helps in making informed decisions based on the specifics of the various available plans.

However, the following are some general considerations to make when picking the best pension plan:

  • Contribution amount:

The entire purpose of a pension is to gradually save money in anticipation of a time when the person may not be as productive. The amount saved must be proportionate to the freelancer's current income, financial responsibilities, timeframe, and so on. 

Also, because freelancers frequently earn irregularly, the contribution plan should be flexible enough to allow you to determine whether you must make regular payments or if you can vary the amount and timing of your payments.

  • Charges:

The fees charged must not take up a significant portion of the money being saved, even though the financial institution providing the pension plan must be paid. It is critical to keep this in mind when selecting a pension plan.

Some plan providers charge annually for things like administration fees, transfer fees, investment fees, penalties, and so on.

Please keep in mind that pension contributions may be subject to taxation, which the financial institution or advisor will pay. This, of course, varies depending on your earnings, tax bracket, and the pension scheme you choose.

  • Investments and management:

In selecting the perfect plan, it is important to choose plans that come with other opportunities for investment. Some plan providers give information about the right range of profitable investments for contributions, risk level, and return rates. 

The ideal strategy should also assist you in managing and monitoring your investment options as you go.

Best practices for your retirement plan

Setting up a retirement plan, like everything else in freelancing, is a do-it-yourself project. As a freelancer with a private retirement plan, it is easy to fall into some common pitfalls that can complicate the process. Let's look at some best practices for making the most of your pension plan:

  • Be disciplined

Saving can be difficult for self-employed people due to a variety of factors such as inconsistent income, debt repayment, unlimited liability, and other expenses (both personal and business-related). No stock, no matching contributions, and no payroll deductions taken automatically to make things simpler. You will need to exercise extreme discipline in order to contribute to your own private plan. This is done by paying yourself first, i.e., setting aside income for savings before you begin any other discretionary spending.

  • Have an emergency fund

Freelancing can be unpredictable in terms of payment schedules and client count at any given time. So, how can freelancers maintain fixed contribution rates? Many freelancers keep an emergency fund that is replenished on a regular basis. They can easily keep up with pension contributions from the emergency fund and replenish when bulk payments come.

  • Have back up plans

Having multiple plans in place will help to reduce risk in the event of an adverse event or compensate for inadequacy. For example, freelancers may have one or two other private plans in addition to the state pension to ensure their financial security in the future. 

Finally, as your savings increase, you should frequently seek professional financial guidance on how to allocate your funds. Some providers give their customers advice on retirement planning for free or at a low cost.

Our software, among other things, assists freelancers in maintaining financial records for their businesses. It's a great tool to use if you're a freelancer looking to save for retirement. 

Run your freelance business with Workee

Workee has helped many tutors, stylists, nutritionists, designers, writers, yoga instructors, fitness coaches, and other types of freelancers. With numerous features to make freelancing easy and successful.

Here are some of the free tools provided by Workee:

  • A professional website that you build in a few minutes, according to the theme and layouts that you love, and discoverable on Google.

  • Smart booking and scheduling features, because freelancers often have multiple appointments across time zones. Workee schedules your meetings and reminds you of them as they draw near.

  • Payments and automated invoicing for services, logs of received payments, automatic tax calculation, and multi-currency support — all without commission fees.

  • Video calls and conferencing with your students, with a notepad feature to take notes during call sessions.

  • Client management software that allows you to easily manage your interactions with clients. Here you can keep all client information in one place, manage sessions, and receive payments.

Get started with Wokee for free now!

Wrapping up

Freelancing has many advantages, but it also comes with a lot of stress. The need to plan for retirement entirely on your own is one of the most important. Retirement savings are frequently postponed until after other expenses have been met.

This is an ineffective strategy. Every employee, including freelancers, should think about retirement and begin making plans for it as soon as possible. The first step is to keep track of your freelance earnings.

Workee makes it much easier to track your income and calculate your pension savings rate as a freelancer. Workee centralizes all of your financial records, including invoices, receipts, and payments. Try Workee today to reap the benefits of freelancing.

Ihor, CEO at Workee

Excited to start with Workee? Schedule a demo with our Manager!


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