Saving for Retirement as a Freelancer
If you were in employment, you’d most likely be paying into a pension and your employer would be contributing on your behalf too. But what about saving for retirement as a freelancer? Planning for the future is one of those topics a lot of us shy away from, particularly in the early years. In fact, it’s something many of us don’t think about until it’s too late.
If we ever want to be able to retire, we need to have a source of income that doesn’t require us to sell our time. And to make sure we set aside enough financial resources to be comfortable later on in life, saving for the future is something we should be thinking about sooner rather than later.
During one of my Charge with Confidence group sessions, we had an interesting discussion about the best way to invest in our futures. Is it better to contribute to a pension or invest in property? In this post, I’ll be looking at both of these options as solutions for retirement.
Pensions for freelancers
Pensions are a fairly simple way to save for your retirement. You pay money into a pension, and your pension provider then invests that money into the stock market on your behalf. Between when you start contributing to your pension and when you draw it, you’ll probably gain a much higher return on what you’ve paid in than if you’d just left the funds sitting in your bank account. Better still, in the UK, the government provides tax relief on the contributions you make to your pension, which means they are effectively giving you money for paying into an official pension scheme.
Pensions are easy to open, and you may be able to transfer any funds you have paid into pension schemes from previous employment into your private pension. That way, you can keep everything in one place and can deal with a single pension provider of your choice.
One of the main benefits is that pensions allow you to invest in the stock market without you having to understand anything about it. Your pension provider will have professionals who manage your funds, investing them in the right places and keeping an eye on them for you. If they see that your investment is suddenly losing money, they will remove your funds and invest them somewhere else. You don’t even have to think about it; you can just let someone else deal with everything.
As with any investment, there are risks involved. You might find that your pension sometimes loses value temporarily. But in the long term, over the decades until you’re able to draw it, the overall trajectory should always be upwards.
There are a couple of things to be aware of before you decide to contribute to a pension. Firstly, pensions offer very little flexibility. You can’t take your money out until you retire, except in very specific circumstances. You should also find out what happens if you move to another country, as this may affect your ability to pay into your existing pension scheme.
Property or pension? Investing in property instead of a pension
If you do decide that a pension isn’t for you, investing in property might be a good alternative. By setting aside the money you would invest in a pension in a private savings account, you can accumulate enough for a deposit on a house or flat. You may then decide to rent out the property for housing or tourist accommodation, using the income to cover any expenses and the cost of the mortgage. If you earn more in rent than you need to pay the mortgage and cover your expenses, you could gain some additional income in the short term. But most importantly, once you retire, the property should be paid for and any rent or income you receive from it will replace the funds you would get from a pension.
You can repeat the process as many times as you want, meaning that it can be exponential. As you keep putting money aside, you can purchase an increasing number of properties. You could even get lucky if you manage to find a good deal on a property in a good state of repair that has been repossessed by a bank.
Investing in property is also a more flexible option than a pension scheme. This is because you would always have the option to sell your property if you needed a significant amount of money before retirement age.
However, as with a pension, there are some aspects you should take into account when choosing to invest in property. Your investment possibilities will be largely dependent on the country you find yourself in. Are property prices accessible to you? Might it be difficult for you to buy property in a country if you aren’t a citizen? What’s more, if you decide to invest in property in a country where you aren’t a resident, you’ll have to figure out the tax situation there.
You should also consider the amount of work that investing in property may involve. Owning and renting properties is like having another small business to manage. In the event of a problem with the property, you are the one responsible. This could become a burden, so it’s better to ask yourself beforehand whether it’s one you’re prepared to handle.
As you can see, there are pros and cons involved in both contributing to a pension and investing in property. If you want to explore this further to find the best option for you, I would advise seeking help from an accredited financial advisor.
No matter how you decide to save for retirement, the important thing is that you are planning for the future one way or another. And don’t forget, the sooner you start, the sooner you’ll be able to retire.
Have you already decided how to invest in your future? Let me know in the comments!
If you’re unsure where to start, in Charge with Confidence I teach you how to set your rates so that you’re earning enough to contribute to your retirement.