Financial Planning for the self-employed
As the UK economy continues with a fragile recovery, one consequence of the recession has emerged. According to a new survey, almost one quarter of all self-employed worked have worked for themselves for less than two years. This seems to suggest that the recession prompted a lot of people to leave the world of employment and set up their own business.
Many factors can prompt self-employment. Redundancy is a major catalyst, particularly for older employees who feel they are able to better apply their lifetime of skills and knowledge in the self-employed arena. With a higher level of redundancies during a recession, it is little surprise that a lot of the people in self employment started down this path within the past couple of years.
When you become self-employed, it is important to review your personal financial planning. The move from employment to self-employment is a major event in financial planning terms, with several areas of planning to consider.
Making the decision to become self-employed will usually involve some planning around cash flow and cash reserves to fund the first few months or years, when income may be scarce or non-existent. If you have been fortunate enough to be able to plan ahead, you should have had the opportunity to build a cash reserve for this purpose.
A higher risk strategy is to take on debt to fund the start-up phase of your self-employment, by extending your mortgage, taking out a business loan or borrowing from friends. If you go down the borrowing route, ensure that you understand the cost of financing this and the risks involved. For example, if you borrow more on your mortgage, you need to be aware that your home is at risk if you do not keep up mortgage repayments.
Protection is another important consideration. When you leave employment, there is a good chance you are also leaving behind the death in service part of your employee benefits. This means that, in the event of your untimely death, your family would be left without the money they need to repay debt and fund their lifestyle in the future.
Other protection that can disappear when you become self-employed includes private medical insurance (PMI) and income replacement insurance. In the case of PMI, it is often possible to convert your group benefits to an individual policy whilst retaining the lower cost premiums of a group scheme.
Whilst on the subject of employee benefits, a major change when you become self-employed is usually to your retirement planning. If you leave the comfort of a good occupational pension scheme, you will probably be shocked by the cost of replacing these benefits with contributions to a personal pension arrangement. What is important when it comes to your retirement planning is to understand what you have got and what you will need. It is then possible truly understand the cost of funding the retirement income you need.
Becoming self-employed is potentially a traumatic time for your financial planning but one that you need to take seriously. The most important allies during this time will be an independent financial adviser, preferably one who has experience of being self-employed, and an accountant to provide advice on the tax aspects of your new working life.