Increasingly, knowledge based industries are relying on an army of freelancers as businesses require more flexible resources than can be secured under normal terms of employment. Companies turn to freelancers and contractors because their skills might be specialist and not part of a regular employees normal skill set or the project may be of limited duration.
Freelancers 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; the company gains because it gets the flexibility it needs without the cost of funding sick pay, holiday pay or a pension fund; and contractors gain because they have the freedom of being in business for themselves, with a more flexible lifestyle. UK PLC also gains substantial benefits because this flexibility supports a far more dynamic economy than could otherwise exist.
Despite a surge in the number of people turning to freelancing in the past 10 years, contractors can still struggle when trying to secure a mortgage, income protection or a pension and 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. Independent Financial Advisers are therefore constantly challenged to find mainstream products to meet the requirements of freelancers.
The financial services industry urgently needs to work to fulfil the needs of contractors and freelancers and should consider the following to bridge the gap.
Mortgages:
A constant issue faced by freelancers when trying to secure a mortgage from a high street lender centres around proving affordability. As specialist IFAs to the contracting community, we base income on gross annualised contract rate rather than on the traditional employee or self-employed income models. Some banks and building societies then stipulate a minimum annual income requirement to ensure that the applicant is a professional in his or her field but all our lenders will then apply their standard income multiples to this annualised contract.
Mortgage market review related tightening of affordability criteria has passed seamlessly by for us thankfully, as 15 years of loan performance data proves to our lenders what good quality borrowers these clients represent. As a result of this, our existing freelancer-friendly lenders were happy to maintain business as usual when underwriting our clients post MMR but 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.
Income Protection:
Contractors typically struggle to get a sufficient level of provision as traditionally insurers only look at salary, which will almost always be low, and/or dividends which are often inappropriate as a true income measure for a freelance worker. Some providers still won’t even allow for split dividends between husband and wife, yet, as a firm we have worked with an innovative provider which has recognised the client’s gross annualised contract rate as a measure of insurable income.
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 proven that the applicants represent a very good insurance risk
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.
However the issue for freelancers here is the reduction in the annual allowance from £50,000 to £40,000 and further discussions around a new even lower limit. This restricts the ability for freelancers and SME business owners to make up the early years of trading when they would understandably concentrate 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 change to a brave new world of flexible retirement without annuitisation.
Summary
As the number of people turning to freelancing and contracting continues to swell, it is imperative that they are accommodated with suitable product offerings from financial institutions. The irony is that a large proportion of contractors work in the City and for financial services companies – the same institutions which recognise the benefits that a freelancer can bring to their organisations are the same conservative firms that do not tailor their products accordingly. There is 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 need. They represent a profitable source of new business, and the wider economic benefits of a healthy freelance community are of benefit to all.
