Pension procrastination

What if you don't want to lock your savings away for decades?

Locking your money away into a pension for decades feels like a big step to take as a freelancer. With a fluctuating income, there’s a natural tendency to hoard any spare cash as a safety blanket. As 2020 made abundantly clear, life comes at you quickly.

The good news is that (in some cases) procrastinating with your pension could be a good move.

The alternative to putting your money into a pension is to consider ISAs. An ISA offers more flexibility than a pension while keeping the crucial tax-free growth.

Pensions offer tax relief when you pay in and charge you tax when you withdraw your money, while the money in ISAs has already been taxed as part of your income and no more tax is due when you withdraw it later.

When saving for the long-term, cash earning 0.1% interest just isn’t going to cut it. That means we’re looking at Stocks and Shares ISAs. With S&S ISAs, your money is invested and is at risk. With that risk, comes higher growth just like the money in a pension pot.

There’s a reason that pensions are invested. Over the past five years, even a cheap bog-standard relatively cautious portfolio returned almost 9% a year on average (and that includes the short-lived corona-crash in the spring). That kind of growth will double your money in less than a decade.

It’s not advised to invest any money that you’re expecting to need within the next five years. If there is a crash, then you’ll want to allow enough time for the market to recover. So this isn’t a place to stash your emergency fund, but it’s a good halfway house if you’re hesitant to lock your savings into a pension at the moment.

The advantage of S&S ISAs is that you can withdraw your money when you want and even put it into your pension at a later date. This is handy if you think you might go from being a basic rate taxpayer to a higher rate taxpayer (earning over £50k, or £43k in Scotland) at some point. You can call on your ISA savings during those years when you are paying higher rate tax to maximise that sweet 40% tax relief by adding all of your earnings over £43,000/£50,000 into a pension.

Alternatively, this ISA trick can be useful if you think you might go back to employment, when your ISA savings can help to boost your pension contributions and get the maximum employer’s contributions.

These might not apply right now, but many freelancers could go through these stages at some point in their career and there’s potentially a lot of savings at stake. Besides, the main advantage is having the flexibility to draw on your savings if necessary. The money in your ISA can be added to your pension later on (within limits).

Note: if you are already in the 40% (or even 45%) tax band then pension contributions will likely be a hands-down winner. And if you’re facing a reduction in child benefit (and an effective tax rate of 57%) then it really becomes a no-brainer.

In short:

  • It is important to save for retirement as early as possible.

  • Investing provides better growth than cash in the long-term.

  • Saving into an S&S ISA gives you both of these and you have the option to put this money into a pension later.


Nothing here should be considered financial advice. Stock market returns are not guaranteed. Please do your own research.

You may also be interested in: Is a pension the right choice for freelancers?; How to start saving into a pension

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