By Tony Harris, MD and founder of ContractorFinancials
Ways of working in the UK are increasingly more sophisticated than the traditional bi-polar worlds of permanent full time employment and self-employment. Today there are an estimated 1.7 million Freelancers working in the UK economy, also referred to as ‘Contractors’, ‘Interims’ and ‘Consultants. These independent professionals can be found in industries such as IT, engineering, oil & gas, project management and in countless other knowledge–based roles.
Freelancing developed because business increasingly required more flexible resources than can be secured under normal terms of employment. Businesses turn to a Contractor because the skills might be specialist and not part of a regular employees normal requirements; there may be a project of limited or uncertain duration; or an organisation could be growing and want ‘to try before you buy’ full time expertise.
Freelance Contractors provide their expertise as a service, taking on board the associated business risks of being outside a traditional employment structure yet this relationship is the archetypal win-win-win. The company gains because it gets the flexibility it needs without the cost of funding sick pay, holiday pay or a pension fund. Contractors gain because they have the freedom of being in business for themselves with a more flexible lifestyle. UK PLC also gains because these developments support a far more dynamic economy than could otherwise exist.
With the upsurge in the number of people turning to freelancing it is increasingly apparent that there is a desperate need for specialist financial products for this community of workers.
With non-standard earnings and without the safety net of a traditional employee benefits package, Freelancers find themselves let down by a financial services industry that is still thinking in terms of a 1950s employment landscape. IFA’s are challenged daily to fit square peg clients into round holes, working to find mainstream products to meet the requirements of Freelancers.
The financial services industry therefore urgently needs to work to fulfil the needs of Contractors and Freelancers and should consider the following:
Income Protection Insurance: As a firm we have worked with two innovative providers which have recognised the clients gross contract rate as a measure of insurable income. Traditional insurers invariably only look at salaries, which will almost always be low, and/or dividends which are inappropriate as an income measure for a freelance worker who will have none of the plant, machinery or staffing costs of a mainstream business but who may choose to retain profit within his or her limited company instead of fall into higher income tax bands.
There really is no reason why providers should be wary of covering these highly skilled, highly motivated individuals on a more accommodating income measure. Our claims record has proved that the applicants represent a very good insurance risk
Mortgages: Again we have found certain, forward thinking mortgage providers which will base affordability on gross annualised contract rate rather than on the traditional employee or self-employed income models. Some lenders then stipulate a minimum annual income requirement to ensure that the applicant is a professional in his or her field but all then apply their standard income multiples to this annualised contract.
Mortgage market review related tightening of affordability criteria has passed seamlessly by for us thanks to 15 years of loan performance data that has proven what good quality borrowers these clients represent. As a result of this MI our existing freelancer-friendly lenders were happy to maintain business as usual when underwriting our clients post MMR.
I would appeal to more Lenders to educate themselves about the nature of the freelancing and contracting community and tailor solutions to meet their needs. Particular work is needed around lending past age 70, into an age that many lenders view as retirement yet a Freelancer simply views as extra years of earnings capacity, doing something they have great expertise in and enjoy.
Pensions: In common with other savers, Freelancers should be able to benefit hugely from the announcement in this year’s budget allowing far greater freedom in terms of how investors access their pension fund in retirement.
A cloud over this brave new world is the reduction in the annual allowance from £50,000 to £40,000 and further discussions around a new limit of £12,000. This restricts the ability for Freelancers and SME business owners to make up the early years of trading when they would understandably concentrated more on building cash flow etc than pension provision. Freelancers and Entrepreneurs, by definition, will be without a cosy 40 years service in a DB pension scheme and any changes that discourage them from leaving the security of a corporate pension environment will only ultimately harm the needs of the wider economy.
We urge providers to lobby the Chancellor on annual limits and also innovate in terms of a combined pension and equity release product to help meet the needs for a world of flexible retirement without annuitisation.
The irony is that a large proportion of our clients work within the city and for financial services companies as business increasingly recognise the benefits that Freelancer can bring to their organisations. These same institutions will often be the same conservative firms who do not accommodate Freelancers in their product offerings. There is therefore an urgent need to acknowledge that freelancers and contractors are here to stay and that firms must innovate to offer these individuals the support they desperately need. They represent a profitable source of new business and the wider economic benefits of a healthy freelance community are of benefit to all.