How to start saving into a pension
What are the easiest ways for freelancers to save for retirement?
Getting your head around pensions can be tricky – it’s almost as if the industry doesn’t want you to understand what they’re doing with your money!
Many articles about pensions get lost in the weeds about the different regulations for stakeholder pensions compared to personal pensions, while leaving you none the wiser about where to start.
So here’s a quick guide to some pension options that tries to make it as easy as possible to take action.
Easy option: If you have a pension pot from previous employment, you can probably still pay into it even though you no longer work there. Once you can dig out your unique customer ID, navigate to the hidden website, answer the secret question, solve three riddles and whatever other barriers these systems needlessly put in your way, you should be able to log in online and make payments into the pot. Watch out though, your pension is probably invested in an expensive default fund, which may well be unsuited to you, and your choice of funds is limited.
Medium option: Sign up to a new pension scheme that offers to make it easy for you. Unfortunately, most pension schemes are not really aimed at self-employed people, so this isn’t as easy as it should be. Providers like government-backed NEST or robo-advisor Nutmeg offer a fixed selection of investment portfolios based on your risk level and investment style.
It can be difficult to compare the fees between schemes as they charge in different ways. NEST charges a one-off fee 1.8% on each contribution, as well as a 0.3% per year on your total pot. Nutmeg charges between 0.62% and 1.06% per year, depending on your choice of investments.
The fees may sound like small change, but when compounded over decades they can add up to tens of thousands of pounds.
Medium+ option: Create a SIPP (self-invested personal pension) with an investment platform. I’ve called this Medium+ because while you can go down the rabbit hole with tens of thousands of investment possibilities, you certainly don’t need to be Gordon Gekko to have a SIPP.
Companies like Vanguard offer target retirement date funds that automatically invest in a vast number of companies across the world and gradually lower their risk as you approach retirement age.
Most articles about pensions warn that SIPPs are generally more expensive than other options. While that can be true, they can also be the cheapest option. The Vanguard target retirement funds cost 0.39% a year (including fund management and the Vanguard platform fee), or you can take the DIY method and replicate this approach using a portfolio of funds for about 0.25% (Medium++ option).
A downside to SIPPs (apart from the ability to invest all your savings into cruise companies in January 2020) is that the minimum contributions are typically higher. Vanguard requires a minimum of £100 a month by direct debit.
If you already have a six-figure pension pot, then it may be worth considering SIPPs that offer a fixed annual fee. iWeb, for instance, charges £180 a year as a flat charge for using their platform.
Finally, there are many, many options for pension providers and schemes to save into. We couldn’t possibly cover all of the options in one newsletter, and there may be better options for your individual circumstances. However, one of the worst things to do is let this complexity delay saving for retirement. Perfect is the enemy of good enough.
You may also be interested in: Is a pension the right choice for freelancers?
This article should not be considered as financial advice. Please do your own research.
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