Thinking about going Freelance?
When you have been working in the city for a while and building your skill set, it is inevitable that the day may come when you consider whether the grass is greener on the side of your freelancing colleagues.
The earning potential is almost certainly greater when you are contracting and the hours are much more flexible which can fit in with your family commitments perfectly but there are some downsides too. Leaving the safety net of your large employer behind can be fraught with problems if you are not financially prepared so the specialist Independent Financial Advisers at ContractorFinancials have put together this short guide to help you avoid the pitfalls that contracting can sometimes present and make the most of your new income.
You’ve decided to contract… Protect your income first
Most people’s entire lifestyle is reliant on a regular income. Permanent employees live under the often false belief that their employer will pay an income through to retirement if they fall ill but as a Contractor you are totally reliant on your ability to work in order to earn. As such an illness or injury that prevents you from working, even for a relatively short time, could have disastrous consequences for your finances.
You can protect against potential loss of income with an Income protection plan which pays out an agreed monthly sum if you are unable to work. There are policies that are tailored to your Contractor status which means you can have confidence that the cover will pay out. You can even arrange your policy so that it pays benefits on the very first day of any illness to mirror the old employee benefits you used to have or you can set a longer ‘deferred’ payment if you have savings to rely on in the short term to help keep the costs down.
Don’t rely on the NHS and consider Private Medical Insurance
When you’re working hard and possibly playing hard too, you run the risk that if you fall ill or suffer an injury the time out of contract costs you dear so avoid NHS waiting lists and get back on your feet quicker with private medical insurance (PMI). With PMI you choose your hospital and date of treatment and with some providers, your premiums won’t increase if you make a claim.
Step on the ladder whatever your employment status
Now that you have saved up a deposit for a house, you will think about taking that first tentative step on to the housing ladder. As a Contractor, you can struggle to secure a mortgage on the high street because inexperienced bank and building society staff won’t understand your unique working structure and will demand three years accounts and references to secure a loan.
The good news is that it is possible to secure your mortgage based on a multiple of your Contract rate alone (and within just one day of you starting your very first contract) via a specialist Contractor Mortgage broker like ContractorFinancials. The expert advisers handle the whole process for you, leaving you to concentrate on the important things – like packing! Initially you’ll want to have a pre-agreed mortgage promise so that you know what you can afford. This agreement will also help in your negotiations so can make all the difference in the competitive housing market of London and other major cities.
Once you’ve found the property the real fun starts but having had your pre-agreement already, your Mortgage Adviser should be able to make the whole process as quick and stress free as possible. They will handle the whole application and liaise closely with your chosen lender to ensure that you move in without delay. Some mortgage brokers will charge a fee for their advice so make sure you ask the question at outset.
Keep that mortgage as competitive as possible
As each 2 or 3 year scheme comes to an end you can play the system by remortgaging onto another competitive fixed or discounted rate. In many cases the new lender will help pay towards the costs of moving your mortgage. Specialist Contractor mortgages are available that are arranged using a multiple of your contract rate and as such you avoid the hassle of providing accounts and references every time your mortgage term comes to an end.
Plan for retirement and save tax today
Many women will qualify for relatively low state pension entitlements, but then also fail to build decent private or employee provision too. All too often, as a working parent you may have been so focussed on raising a family and the demands of your employer or clients that you may have forgotten to think of number one.
Retirement may still seem a long way off but by the time you get to 40 you will only have 240 ‘pay days’ left before you reach 60. Ideally you will have started saving in your 20s because the earlier you start planning, the higher your income will be in retirement. If you are starting to worry that your current plans may not stand up to the rigours of retirement then don’t panic as it is never too late to start investing.
The great news for Contractors is that you can benefit from up to 64% tax relief on pension contributions either via salary sacrifice with your Umbrella Company or if you work through a one man limited company you can invest via the corporate bank account. This can offer a significant tax saving now whilst providing a significant boost to your future standard of life.
Make the most of the tax-free savings allowance as you can invest up to £15,000 in an ISA and up to £4000 in a junior ISA for each of your children.
With an ageing population and dwindling state pension, it has never been more important for women to invest early in your future and by your late 30s and 40s time is running short if you’re to avoid future hardship. Monies built up from your contract income may be gathering dust and all the time the taxman is getting more than his fair share of your income. Put more of your money to work now using a pension and boost your chances of sustaining your current lifestyle past retirement.
Tony Harris has been an IFA for over 20 years and set up freelancer specialist website ContractorMoney in 1999 after recognising a need for specialist financial advice for contractors. Having incorporated ContractorFinancials in 2002, the company has grown to be the leader in its field with over 18,500 clients offering jargon free and timely mortgage, pension, insurance and investment solutions.