How it Works

Financial Independence is that stage in life when we have sufficient wealth to support the life-style we have chosen without having to work, it is a goal we all dream off. With financial discipline underpinned with an achievable financial plan, it is a dream which can be realised by all Freelancers. We must not however live only for the future as tomorrow is not promised to everyone as sickness, accidents and life’s challenges throw up obstacles that both affect our ability to work and our mortality. So we have to balance the achievement of Earnings & Wealth Maximisation and living a happy and fruitful life. As we travel through life we first focus on Life Planning, getting a nice house to live in, good car, living expenses, cost of children, holidays and the small luxuries we enjoy. As we get older, become more experienced and our annual pre-tax profit and savings exceed our daily business and personal needs, Financial Planning refocuses us on our future needs as well as the present. In simplest terms, we are all aware of the concept of compound interest whereby through savings being invested year after year we get the multiple effect of interest being added to interest increasing the base sum each year, giving you a larger sum on which interest will calculated. Financial planning is in essence this effect, where multiples are made larger than base interest by applying tax optimisation rules, investing in various low to high risk opportunities with set and flexible times limits upon which your investment is returned to you. Various Insurance products then protect your wealth as it grows. Location Planning normally become an option for expatriate Freelancers or those on extremely high gross profits or those who have accumulated high net worth where living in tax neutral locations brings accelerated profit enhancing opportunities by investing tax savings as well as utilising their current wealth. Earnings & Wealth Maximisation is looking say 10 or 15 years into the future and when you look back, ask yourself if you really and truly by prudent and informed action, eliminated unnecessary tax leakage and did you made your money work hard for you at a risk profile acceptable to you. Did you plan to become Financially Independent at the planned age of say 55 rather than at 65 or will you could still be trying to understand when you can actually retire.

At IFA, we have the lifetime experiences of 1000’s of Freelancers to draw on and have outlined a simple 6 stage process that will enable you to balance the scales of Life Planning and Financial Planning. This will allow you to arrive at an informed view on financial products and services; you will be able to have an intelligent meeting with a Regulated Independent Financial Advisors; you will be in the driving seat looking to author your bespoke Wealth Maximisation Plan, buying products you need rather than being sold products you don’t understand.

Stage 1: Building Wealth

As a general rule, if you are a successful Freelancer your Annual Gross Profit (AGP) should as a minimum, match your age (i.e., 30 year old should have a £30K AGP). As you get older not only should it match your age but multiples of 1.5 to 3 are very common as you become more experienced, some of you will reach consultancy status (i.e. 50 year old Oil & Gas consultancy AGP being £150K). Between the ages of 20 and 30, a typical Freelancer will be building up their business, family assets and be catering for family needs. Most of the AGP will therefore be utilised and any excess funds may be best placed in Saving Accounts and High Interest Accounts where instant access is normally without penalty. Notwithstanding, small safe investment in ISA’s and similar mechanisms are common but don’t be in too much of a rush to lock away funds that you may need when you are out of contract. Your focus should be on Life Planning (getting your foundations built and enjoying your young life…it will soon pass by). The internet and other mediums will give you lots of information to enable you to make an informed decision on probably your single biggest decision which will be the type of mortgage you take out. Freelancers usually have the benefit of having an accountant advisor who will also be able to assist you on this decision-making process.

Stage 2: Protecting Wealth

As a Freelancer, by the age of say 35, your assets and wealth have been very hard earned and the continuing enjoyment of these by you and your family need protecting. Financial Planning has now entered your life and without too much of an impact on your AGP you can make provision to protect your current achieved wealth and lifestyle through critical long term illness assurance, out of work income protection insurance and life assurance etc to give you peace of mind. Should you find yourself with an AGP that triggers higher rate tax and you have substantial surplus funds then you will need to implement Stage 3 early.

Stage 3: Tax Optimisation & Wealth Distribution Planning

At the age of 45, your AGP should be in the region of £45K and if you project this to the age of 65 without making further allowance for rate increase, you have circa £900,000 of AGP from which you need to maximise your wealth to provide for your retirement. You are now on the Earnings & Wealth Maximisation Planning line and depending upon your specific circumstance and needs, you will need to utilise financial products and services to enable your hard earned money and assets to grow in line with your risk profile. Your Freelancer Accounting advisors should be able to advise you at this stage on key areas like income tax planning and corporation tax planning and the services of an Independent Financial Advisor should be sought on advice regarding Writing your Will, Investments and Private Health Care. YOU are your business, so as well as having healthy accounts you need also to be kept in good health.

Stage 4: Investment Maximisation Planning

At the age of 50, your have your substantial wealth already accumulated and with an AGP of £50K, you have circa £750,000 by the age of 65 to maximise. By this time in life you will be a mature individual, you know your own needs and those of your family, Life Planning now requires revisiting with a focus not on building up your business but on retirement….yes it comes to us all. The investment decisions you make now and how your next five years AGP is utilised will be pivotal in the outcome of your retirement provision. You need to consider in detail your Investment Portfolio, Pensions, and Large Capital Investments. Will the outcome from these and other mechanisms recommended by an Independent Financial Advisor provide you with sufficient funds to enable your to enjoy without risk, your retirement and the life style plans you have to enjoy it? If the answer is no, you still have time to take action to rectify this but you need to act now. Develop a 5 year Plan with your regulated Financial Advisor, lock it down and deliver it.

Stage 5: Advance Tax Optimisation and Wealth Distribution Planning

At the age of 55, you should by now have locked down your wealth expectations and your retirement age but if you intend to continue to work till 65 with the same level of earnings you will still have £550,000 AGP to manage on top of your locked down wealth already accumulated. Whether you are an expatriate Freelancer or not, Location Planning now requires consideration as your Tax Status (i.e., non-resident) will substantially influence your next 10 years Net Tax Profit. This should also be considered as part of you Life Planning review, questions will include where will you be spending your retirement if abroad, can this be started earlier to give additional scope for your financial advisor to work with. Essential products you now need to consider are Inheritance Tax Planning, Trusts and Offshore Investments amongst others for consideration within your Investment Portfolio.

Regarding Life Planning, moving abroad may sound exciting and the tax benefits sound great but life is to be enjoyed with family, friends and within safe settings; your wellbeing and happiness are essential variables in life that you can influence. We can not avoid Death and Taxes but these can be influenced by looking after your health and by the sound accounting and planning you have done through stages 1 to 4….think carefully regarding your residency, the extra wealth via tax opportunities may not balance up with just being happy and content….remember your partner’s view is equally important.

Stage 6: Financial Independence

Financial Independence is reached when the income you get from your savings provides sufficient funds to enable you to enjoy a set lifestyle without further work. It need not be of a Hollywood standard, remember you can only sleep in one bed, drive one car and live in one house at a time. Upon retirement or reaching financial independence, we recommend that you do a full review with your independent Financial Advisors and consider moving your assets into zero risk interest bearing investments where you can plan to enjoy your set life style for the rest of you life with provisions made for inheritance tax and any ongoing income tax optimisation etc. Don’t be tempted to put your under-utilised energy into playing with your assets or being advised to take any risks with them (remember financial advisors make money from your money!) as you can now not replenish your wealth should you suffer misfortune through a bad investment. Your partner’s advice is now paramount in further decision making….if an opportunity is too good to be true then it will be….keep what you have and enjoy it.

In summary, the above is only a guide as there is no one size fits all solution, it all depends upon your unique circumstances, profession, your charge out rate, your pre-tax profit, number of days you work per year, continuity of contracts, your health and many more variables. As an Informed Freelancer however, you now have some basic tools and awareness that will guide you towards Financial Independence. Good luck, no we are not wishing you well, luck is not an option, good planning is.