Many of us dream of an early retirement. For contractors, however, it can sometimes seem more complicated because they don't have a traditional workplace pension plan like employees do.
Without being auto-enrolled into a pension scheme like their employee counterparts, contractors may have to plan a little harder to achieve an early retirement.
In this guide, Umbrella Search outlines our top tips to help every contractor plan for the future and aim for early retirement.
1. Understand the ups and downs
Contractors know that, unlike employees, their income can vary from month to month. A contractor's income will face peaks and troughs due to the nature of contracting. Some months, you will be working on contracts more lucrative than others; some months, you may not have contract work at all.
Although irregular income can make it difficult to plan financially, the good news is that contractors are usually paid more than their employee counterparts. This means that by being a higher earner, you can play this to your advantage when saving for the future.
2. Enrol onto a pension plan
Unlike employees, contractors aren’t auto-enrolled into a pension scheme, so it’s important that contractors take care of this themselves.
The great news is that there are pension plans out there designed for the self-employed, such as contractors, which allow you to pay in different amounts each month, such as Pension Bee. This is good news for contractors and means that if you're working on a higher value contract, you can contribute more to your pension. Likewise, if you're taking a break from contracting, you can press pause on your pension contributions.
You may find it helpful to make use of apps or software that help you track your income and expenses so you can decide what you will contribute to your pension from month to month. Apps such as Xero or Quickbooks can help with this, as well as more general accounting.
For contractors that work for an umbrella company, the great news is that the umbrella company will enrol you onto a pension plan and even contribute towards your pension, meaning you can save without even having to think about it.
3. Set your goals
As well as understanding how much you have to set into a pension pot each month, contractors will also need to work out how much they will need to live comfortably in retirement.
By working this out, you will be able to make strategic decisions on saving for the future. After all, the earlier you start saving, the more attainable your goals become.
It can be helpful to use a pension calculator tool which you will find readily available online. Alternatively, think about your estimated future living expenses, such as lifestyle costs, housing and any extras. You should then consider at what age you wish to retire to understand how long you have to save.
4. Keep debt to a minimum
It's important to keep debt to a minimum as this can be one of the biggest obstacles to retiring early. Things like credit cards or loans can make it harder to save and slow down your path to early retirement.
For contractors who don't always have a steady income, it can be tempting to become dependent on things like credit cards but this can mean that you become trapped in debt. Although debt may be necessary at times, it’s important to reduce your debt or pay it off where possible.
If contractors have any outstanding high-interest debt, such as a credit card or high-interest loan, then you should aim to pay this off first. After all, interest on these can compound and become more and more difficult to pay off the longer it builds up.
5. Look into Tax-Efficient Savings
Once you’ve got your debt under control, the next step is to start saving.
To help maximise your money for the future and increase your savings for retirement, there are several tax-efficient ways to save that contractors can take advantage of.
These include:
- Pension contributions: as we have already discussed, saving into your pension not only helps you save for the future, it is also a tax-efficient way of doing so. This is because pension contributions are tax-deductible, meaning that contractors get tax relief on the money put into their pot. This reduces your tax liability whilst helping you save for the future.
- ISA: another tax-efficient way to save your cash for retirement is through an ISA or an Individual Savings Account. With an ISA, your money will grow tax-free and there are no taxes owed on money withdrawn. The ISA allowance is currently £20,000.
6. Take advantage of other ways to invest and save
In addition to taking advantage of tax-efficient ways to save for the future, contractors can also look into investing their money in other ways to help grow their money over time.
Contractors might consider stock market investments, which can provide high returns, especially compared to savings accounts.
You may also consider investing in property which can not only bring in a reliable stream of rental income, but also grow in value over time.
When it comes to investing, it can be complex, and you may find that it is worth seeking financial help to guide you in the best way forward. A financial advisor will be able to look more broadly at your situation as a contractor, taking into account how much you earn, to help you with the best ways to save for the future.
Use an umbrella company
Now that you've read our top tips for retiring early as a contractor, you can start planning for the future. But you will also need to think about the present.
If you’d like to find out more about contracting through an umbrella company, Umbrella Search is here to help. Working through an umbrella company can make your life much easier as a contractor, and comes with the added benefit that the company will enrol you onto a pension scheme and help you start saving.
Get in touch with the Umbrella Search team and kick start your contracting career today.
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