22nd May 2018
The UK workforce is undergoing dramatic changes. An increasing number of people are now working for themselves, whether by choice or circumstance. Over 4.5 million people in the UK are now self-employed, an increase of 24% (3.9 million) over the last decade.
This shift creates a dilemma in that, unlike people in PAYE jobs, these individuals do not benefit from auto-enrolment workplace pensions.
The rules on workplace auto-enrolment schemes were changed in April 2018 so that the minimum contributions from employees and employers were changed to 2% and 3%, respectively.
The self-employed do not have this luxury. These individuals are therefore missing out on pension contributions from their employers, as well as not being opted in to make a direct contribution from their own monthly earnings.
Because policymakers are unlikely to address this issue any time soon, self-employed workers should consider planning for their financial futures by opening and an investing in an IFISA.
Why is it important to invest money for the future?
We are living in a culture in which individuals are being forced to become self-reliant for their own health and well-being, as opposed to relying on the state.
The state pension in the UK is currently £164.35 and is reliant on making full qualifying national insurance contributions. Policymakers have said that this amount is unlikely to be enough for pensioners to live off in itself. The age at which recipients receive this gradually increases. At present, it is 65 but is set to rise to 67 over the next decade.
These changes are likely to hit the self-employed hardest due to there being no equivalent of a private pension available. They may also find it more challenging to make enough NIC contributions to qualify for the state pension.
How The Self Employed Can Use The IFISA As A Substitute For Private Pensions
The Innovative Finance ISA (IFISA) is a specialist ISA first introduced by the Government in 2016. It has all the benefits of traditional ISAs in that interest can accumulate while in a tax-free wrapper.
However, the IFISA is different from traditional cash ISAs in that they allow individual to deploy debt crowdfunding finance to growing British businesses.
The expected return on an IFISA is much higher compared to the cash ISA. The percentage return offered by the best performing easy access cash ISAs is 1.3%; the Crowd2Fund IFISA offers an estimated average APR of 8.7%.
Usage of the IFISA and its associated tax wrapper by self-employed individuals means that up to 45% can be saved on the interest as funds grow, tax-free. This creates a flexible and high-return product with numerous investment choices for people who do not receive a pension from their employer.
Returns
The IFISA allowance in the current tax year is £20,000. If this is invested in full from the first day in the tax year, and assuming an average APR of 8.7%, the value of this portfolio would increase to £46,060 after 10 years - a return of £26,060.
Based on the same set of assumptions, the value of this one year’s IFISA allowance would in essence double after nine years, having a value of £42,374.
Strategies For How The Self Employed Can Use IFISAs
Unlike people in PAYE jobs, the self-employed do not pay tax at source on their earnings. Instead, they complete self-assessment tax returns annually and pay their due taxes by 31 January the following year.
This means that those who are self-employed have to keep a large value of cash liquid enough to pay their income taxes at a later date.
People who work for themselves should get into a regular habit of investing funds into their IFISA wallets on a monthly basis. This will create a saving habit, as well as helping them to work towards using their IFISA allocations in full.
Their income is likely to fluctuate depending on how much work they take on in a given month, which means that IFISA deposits are likely to be less consistent over time. The amount which can be deployed each month should be given consideration based on income generated in the previous month, invoices paid, and associated taxes due.
In some instances, individuals may wish to temporarily allocate their estimated taxes within their IFISA and benefit from short-term growth. However, it should be noted that this strategy carries an element of risk and would result in the IFISA tax wrapper being broken once funds are withdrawn to pay taxes.
With the trend of people becoming self-employed set to rise within the coming years, it is increasingly important to consider alternatives to the traditional workplace pension.
Crowd2Fund’s IFISA offers a way for the self-employed to plan for a financially secure future, while at the same time providing the opportunity for people to support innovative and growing British businesses.
Sign up to the Crowd2Fund IFISA here. Capital at risk.
