ISAsJun 6 2019

Investment solutions for the self-employed

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Investment solutions for the self-employed

It is no secret that the gap between those with access to affordable financial advice and those without has only gotten worse in recent years, or that self-employed workers are at risk because the majority are not saving adequately for retirement.

According to research from Fidelity, almost two in three self-employed people admitted they had no pension savings, compared to only 32 per cent of employed people. 

And only 20 per cent had invested in stocks and shares, with Isas being the most popular investment vehicle used by 39 per cent of self-employed people.

But with more solutions becoming available, such as a robo-advice service designed specifically for the self-employed and freelancers expected to launch soon, there is hope of bridging the advice gap by increasing access for those that are self-employed.

But aside from saving into a pension, what else can self-employed people do to boost their savings for the future?

If things do get tough and the self-employed need to tap into savings, at least they have access to the money if they need it.Adrian Lowcock

The reality is that investment options for the self-employed are the same as if they were employed, according to Adrian Lowcock, head of personal investing at Willis Owen.

However, the client’s circumstances are materially different, which can have a big impact on the type of investment products they might use.

The first crucial point self-employed clients need to consider is cash flow because their work might not be as regular and knowing when they will get paid for work is less certain, suggests Mr Lowcock.

He says: “They’ll [also] need to plan to pay any tax bills which might be due, review their national insurance contributions and make sure they have built up the qualifying years."

Building a portfolio

Once cash flow, tax and national insurance contributions have been accounted for, it is time to consider investing.

“In terms of investment, a diversified lower-risk, multi-asset portfolio will protect from market volatility and serve to allow cash to be available to top-up living expense budgets if a leaner month arrives,” says Tom Sparke, investment director at GDIM, a discretionary fund management firm in Cambridge.

He adds: “An actively-managed portfolio can help to mitigate large swings in values and ensure that withdrawal is appropriate as and when the time comes, but that will also help to grow in value."

Since cash flow is potentially an issue, an Isa would be a preferential place to start with, points out Mr Lowcock.

He explains: “This is because they offer significant flexibility and accessibility.

“So if things do get tough and the self-employed need to tap into savings, at least they have access to the money if they need it.”

He adds: “Of course, to avoid this it would make sense for most self-employed [clients] to have a decent amount of cash savings – I would suggest around six months of normal income.

“This would help smooth out their cash flow and maintain a more regular income.”

Similarly, Mr Sparke says: “With regard to savings, Isas are essential for everyone who is looking to save and, having established a risk level with an adviser, there are a wealth of options available.

“However, with a less reliable income stream, a regular savings plan may be less appropriate, as available cash will vary from month-to-month, to an account which can take occasional lump sums would be more suitable.”

In 2016, the government introduced flexible Isa rules.

As a result, clients can make withdrawals from their Isa without affecting their annual allowance or investment’s tax-free status, as long as they put the money back in the same tax year, explains Victoria Rutland, chartered financial planner at EQ Investors

She says: "For the self-employed who often have less job security and need access to money during tighter times, this flexibility is a big plus.

"Isas do not benefit from tax relief on contributions as pensions do, but there is no income tax to pay on any growth and withdrawals are tax-free."

Long-term investments

According to Mr Lowcock, once Isas have been considered, pensions come back on the scene.

He explains: “Carrying forward any unused allowances could prove useful as it would allow self-employed to take advantage of years when they have higher earnings and when they couldn’t utilise the full allowance.  

“This would also mean they could make more substantial pension contributions later.”

With the advent of AE, the employed will be very likely to have some provision for retirement without taking out their own personal schemes.Tom Sparke

He continues: “Auto-enrolment has also largely passed the self-employed and it is clear that many have significantly less invested in pensions than those who are employed.

“However, depending on how the self-employed individual is 'employed' – for example, if they work through their own company – they could make pension contributions through the business effectively as a salary sacrifice, which is the most tax-efficient way to make pension contributions.”

While Mr Sparke says: “With the advent of AE, the employed will be very likely to have some provision for retirement without taking out their own personal schemes. The self-employed will not often have this safety net.  

“A low-cost personal pension or self-invested personal pension is likely to be a good option and, depending on the client’s priorities, a platform or a scheme directly with a provider can both make sense.

“Longer-term savings can often mean that a higher risk level is appropriate, so portfolios containing more equity and higher exposure to growth markets may be a good option to help build up a nest-egg for retirement."

He adds: “With retirement in mind, both active and passively-managed portfolios could be appropriate as there is ample time for the portfolio to recover from any drops in value.”

Contingency planning

Though there are not usually any particular considerations that are entirely unique to self-employed workers, it is essential to maintain a suitable contingency fund as with any client, regardless of their employment status, suggests Jamie Smith, a financial adviser at Foster Denovo.

He explains: “This is typically a cash fund to cover any short-term needs or emergencies.

“Self-employed workers may be more inclined to maintain a higher contingency fund, particularly if they have earnings that can fluctuate. They should also, of course, ensure they have sufficient liquid funds to meet any tax liability.”

He adds: “For those self-employed small company workers, an important consideration might be around how they extract profits from their company as tax efficiently as possible in order to build up their longer-term savings.”

victoria.ticha@ft.com