Self employed? Building a financial safety net



“I learned the real value of income protection coverage”: Self-employed? Building a financial safety net

Leaving the nine-to-five and becoming your own boss is a dream for many – and in recent years, more workers than ever have taken the plunge.

There are more than four million self-employed workers in the UK, while the number of small businesses grew by 8% in the second quarter of this year, compared to the same period in 2020. However, when you switch to work self-employed, you lose the financial safety net provided by an employer if you fall ill and cannot work.

This doesn’t mean your financial well-being is at risk – you just need to protect yourself.

Plan Ahead: Katie Beardsworth has an income protection policy at the top of her to-do list


Katie Beardsworth, 35, has an income protection policy at the top of her to-do list. She knew the value of such a blanket when she was young and her mother fell ill with Ménière’s disease, then breast cancer, and was unable to work.

Katie is the independent founder of two music companies, Polyphony Arts and Mixtape Music Makers CIC, and lives with her husband and four year old son in North Tyneside. She is considering purchasing a policy to help her maintain her household income if she could not work.

Katie’s mother, Anne, claimed monthly income for 15 years on her income protection policy from Canada Life after having to stop working as a self-employed lawyer.

“Mum bought the policy because she was the primary employee and my dad was 19 years older than her and already semi-retired,” says Katie. “She wanted to be sure that we could continue to pay our bills if she got sick.

“She had expected to take care of my father in his later years, but in the end it worked the other way around.”

Save for a nest egg

The incomes of the self-employed tend to fluctuate, unlike the regular monthly paychecks that employees receive.

To help smooth out the peaks and troughs in your income, try building a nest egg.

Place the money in an easily accessible interest-bearing savings account.

Remove cover

If you are unable to work for more than a few months, the savings are unlikely to be enough to live on. After all, statutory sickness benefit is not available to the self-employed – only to those with an employer.

You will need to find another way to cover your mortgage or rent and other essential costs. This is where insurance can prove invaluable.

Critical illness coverage pays a lump sum if you are diagnosed with certain critical illnesses.

It’s also worth noting that some employers pay a lump sum to beneficiaries if you die while working there. An alternative for the self-employed is to take out life insurance.

Income protection pays part of your income if you can’t work because of poor health or injury. Most policies cover the coronavirus and the effects of the long Covid.

Maintain income

Income protection tends to pay between 50 and 70 percent of your regular income if you can’t work, either for a set period of time or until you reach retirement age.

When you are self-employed, it can be difficult to prove an accurate estimate of your income to an insurer. However, an increasing number of policies are designed specifically with fluctuating incomes in mind.

Insurer LV = last month launched a mortgage and rent coverage policy for self-employed and flexible workers, offering up to £ 2,000 per month for up to two years. You don’t need to work a certain number of hours or show proof of income to qualify, but the allowance should not be more than your housing costs.

British Friendly’s Breathing Space works the same and pays up to £ 250 per week. There is no minimum working hours requirement, but insureds must prove their income. Other policies require people to work at least 16 hours a week, but are designed for those without a regular income.

Short-term policies include Nationwide Health and Injury Insurance, Aviva Cost of Living Protection and MetLife Mortgage Protection.

What it costs

The price of income protection is based on factors such as your age, occupation, lifestyle, and health.

For example, a 32-year-old might pay between £ 14 and £ 35 per month for £ 1,000 per month of coverage until retirement, while a 45-year-old might pay between £ 20 and £ 70 per month for £ 1,500. one month of coverage, according to the LifeSearch insurance broker.

You can often reduce monthly premiums by delaying the start of policy payment. This can be a good option if you know you could cover your expenses with your savings for a few weeks or months.


Self-employed workers are just as entitled to tax relief on their pensions as employees. This means that for every £ 80 they put into a pension, the government will top it up to £ 100. Higher rate taxpayers only need to pay £ 60 into a pension for it to be supplemented up to £ 100.

But unlike employees, to whom occupational pension schemes are offered, self-employed workers must open and manage a pension themselves.

Stakeholders’ pensions must meet government requirements, such as limitation of fees charged. Another option is a self-invested personal pension.

Rosie Richard of Hargreaves Lansdown wealth manager says: “A Sipp gives you flexibility. You pay regular monthly amounts and add in payments as you can. ‘

A Lifetime Isa is another option, which offers a 25% tax-free bonus on anything you can save, up to a maximum of £ 4,000 per year. This can be a good choice for base rate taxpayers and is available to savers under the age of 40.



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