As more and more people reject the traditional working structure in favour of becoming self-employed, millions of people could be at risk of financial insecurity as they lose out on employee benefits that offer protection in the present, and financial planning for the future.

Figures from the Office of National Statistics show that there were 195,000 new self-employed people in the UK last year, compared to 11,000 employed people. Overall, that means that 15.1% of the UK’s workers are currently self-employed, which accounts for around 5 million people.

While self-employment can offer more freedom in terms of hours and location, it doesn’t come without its cons. Earnings can often be higher for the self-employed, but they stand to miss out on employee benefits and protection that could help safeguard their future and that of their family.

On a basic level, the self-employed can miss out on sick pay and holiday pay, as well as paid maternity/paternity leave. There are also a number of benefits offered by some companies that provide added value day-to-day, including free or reduced-cost childcare, company cars and bike schemes, discounted gym memberships, free cultural trips, subsidised canteens, shopping discounts and much more.

In addition, all employers are now required to offer a company pension scheme, and many also provide health insurance, critical illness cover, income protection, and death in service protection, which can offer essential financial support and peace of mind for you and your loved ones.

When choosing to go self-employed, or when reassessing your employment needs, it is important to bear in mind that your financial planning should extend well beyond preparing your taxes.

Savings

While it’s important for most people to save enough money to cover unexpected life events, it is particularly crucial for the self-employed. Having money set aside to maintain income during planned holidays, as well as unexpected sick days, will help to maintain steadier finances throughout the year.

Similarly, if you plan to start a family, it is important to take into account any maternity or paternity leave, reduced hours, or time off to perform caring duties.

Statutory maternity pay currently continues for up to 39 weeks, with the first six weeks paid at 90% of your average weekly earnings (before tax) and a further 33 weeks at £148.68 per week or 90% of your average weekly earnings – whichever is lower.

Those who are self-employed can receive some maternity allowance if they have regularly made Class 2 National Insurance contributions, yet this is likely to be significantly less than for those who are employed.

As a self-employed person it is vital to make provisions to cover any potential loss of earnings during this time, and there are a number of savings and investment options available to suit your individual needs and financial ambitions.

Pensions

It is now a legal requirement for companies to offer a workplace pension. Employees are automatically enrolled if they are aged between 22 and the State Pension age and earn more than £10,000. A minimum of 8% of an employee’s salary is paid into the scheme, of which at least 3% must be contributed by the employer.

Those who are self employed would be wise to set up a private pension. Retirement often lasts 25 years or more and it is important to plan financially beyond the State Pension in order to live as comfortably as possible when you retire.

Meeting with a financial advisor to discuss the level of pension any current arrangement may provide is the first step. If you currently have no pension provisions or these don’t meet your expectations for retirement, your advisor can help to recommend contracts that are best for your individual situation and your retirement needs.

It is worth considering adjusting your contributions to match the amount an employer might pay in, or you could be at risk of failing to pay enough into your pension to meet your financial targets.

Protection

Life can be busy and it is easy to focus on immediate concerns over protecting your future. Thinking about accidents, illness, and death can be unpleasant, but it is crucial to take appropriate steps to plan for yourself and your family should the worst-case scenario occur. Often employers offer protection as part of their benefits packages, but self-employed workers will have to take out personal protection themselves.

Income protection is one of the key factors to consider for the self-employed. If you find yourself unable to work due to illness or incapacity, a self-employed worker will have no employer to pay their salary during this period. This could result in both short-term and long-term financial struggles, such as not being able to make mortgage payments and risking losing your home.

Income protection insurance offers a safeguard against the devastating impact of long-term incapacity, with a monthly, tax-free income, which continues until you return to work or reach the end of the policy’s selected term.

There is also the option to take out a specific mortgage payment protection, which provides a regular income to cover your mortgage payment for a specified period of time should you be unable to work due to illness, injury or involuntary unemployment.

Critical illness cover is designed to pay a lump sum if you are diagnosed with one of the illnesses specified in the plan and survive for a period of time after diagnosis – usually 28 days. Different plans cover different illnesses and the level of cover also varies between insurers and plans. It is crucial to ensure you chose the plan that is right for you.

Funds can be used to assist with physical, emotional and financial trauma following a diagnosis, unexpected bills, and to pay off a mortgage or pay for a holiday to aid recovery after a treatment.

It is also important to make provisions for your dependents should the worst happen. Life insurance can cover your mortgage and offer financial support for your family, providing peace of mind that your loved ones will be cared for in the event of your death.

There are two distinct kinds of life insurance – term assurance and whole of life insurance. Term assurance pays a lump sum or regular income in the event of your death up to an agreed date, after which the policy ceases. Whole of life insurance covers you for your entire life, and similarly pays out a lump sum, or the value of the invested fund – whichever is higher.

As your life changes, so do your protection needs and it is important to review your policies to reflect higher mortgages, more dependents or other new circumstances.

To discuss how to protect yourself financially, save and plan for the future as a self-employed person, contact our expert team at Vintage Wealth today. We can help advise on the best savings solutions, pensions and protection to suit your individual needs and budget to give you peace of mind, allowing you to concentrate on thriving professionally.