4 Ways To Invest For The Future As A Self-Employed Professional

Are you a self-employed professional wondering how to invest for the future? This article is here to help.

According to Statista, the number of self-employed professionals in the UK is 4.2 million as of November 2021. That’s a fall from a high of more than 5 million pre-pandemic. Nevertheless, the lure of being your own boss is strong, with the ability to pick and choose work that fits your lifestyle and financial needs.

Although some quit self-employment in favour of a career they perceive to be a safer bet, many others prefer to carve their own career path and build for the future. If you’re newly self-employed, or you’ve been self-employed for some time and only now starting to look ahead, it’s important to think more seriously about saving for the future.

If investing in finance is something that feels foreign to you, don’t panic. We’ve got you covered, with four savings opportunities to build a valuable nest egg for the future as a hard-working sole trader.

1. Self-Invested Personal Pensions (SIPPs)

As the name suggests, a SIPP is a self-managed personal pension plan. You have total control over what you invest in and when. Your annual contributions to a SIPP are capped at 100% of your salary, with tax relief applicable for those earning up to £40,000 a year. If you earn £30,000, you can pay £30,000 to your personal pension if you can afford to. It’s possible to invest lump sums or set up a standing order from your current account to move regular monthly sums across to top up your plan.

It is one of the most tax-efficient ways to invest as a self-employed professional. That’s because you’ll receive 20% tax relief from the UK government on anything you pay into your SIPP. Higher rate income taxpayers can claim more tax relief through their self-assessment tax returns.

With a SIPP, you also have the added flexibility of investing in additional asset types. This includes everything from overseas equities to property and land as investment trusts and exchange-traded funds (ETFs) that have holdings in firms that buy and lease real estate. At present, you cannot access money invested into a SIPP product until the age of 55 and this ceiling is due to rise to 57 in 2028.

2. Cash ISAs

Cash ISAs allow you to save up to £20,000 per annum in an ISA and accrue tax-free interest. They are available for people aged 16 and over and you must be a UK resident.

One of the main benefits of a cash ISA is that it offers easy access to your funds whenever you need them without incurring financial penalties for withdrawing them. However, some ‘easy access’ cash ISAs do set a limit to the number of withdrawals you can make each year. Another key benefit is the ability to transfer money within cash ISAs into other ISA products that may yield bigger returns when needed.

Look out for some cash ISAs that seek to entice you in with high rates of interest for a short-term period before tailing off to a much more modest level. Nevertheless, nothing is stopping you from moving funds from one cash ISA to another offering an improved interest rate.

3. Stocks And Shares ISAs

A stocks and shares ISA is another tax-efficient way to invest your hard-earned money. Currently, you can set aside up to £20,000 a year into a stocks and shares ISA. The biggest benefit of a stocks and shares ISA is that you don’t incur capital gains or income tax on any profits from your investments. It’s also good to know that you can move funds from other ISA products like cash ISAs into a stocks and shares ISA to magnify potential profits at times when you have the utmost confidence in your portfolio.

These products provide a ‘tax wrapper’, as stocks and shares ISAs earnings are shielded from capital gains. With some brokers like Freetrade, it’s also possible to invest in fractional shares, which enables you to buy into some companies that may otherwise be out of your reach. This allows you to get a piece of even the biggest equities and diversify your long-term investment portfolio. For peace of mind, most regulated brokers in the UK are part of the Financial Services Compensation Scheme (FSCS), which gives investors peace of mind that funds are safeguarded in the event of company failure, up to a maximum of £85,000.

4. Lifetime ISAs

Lifetime ISAs (LISA) are one of the newest forms of ISAs from the UK government. A LISA is more typically geared towards millennial and Gen Z savers either looking to save for the first rung of the property ladder or saving for retirement well in advance.

According to GOV.UK, it’s possible to invest up to £4,000 during each tax year, with each LISA account given a 25% top-up bonus from the UK government each month. If you invest the £4,000 maximum, this means you’ll earn up to £1,000 a year from the government.

When you invest in a LISA — or indeed any of the ISA products available — you will eat into your yearly ISA allowance of £20,000. Let’s say you invest the full £4,000 into your LISA, you can only invest another £16,000 into a stocks and shares ISA during the same tax year.

This should provide you with an overview of the savings landscape open to self-employed professionals across the UK. With state pensions being dished out later than ever, sole traders must manage their own finances sustainably with a healthy balance between today and tomorrow.

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