A contractor’s guide to financial services
What financial service products do contractors need? There are a several financial service products that contractors may want or need to invest in, since they might not get any of the benefits that employees do, for instance sick pay, holiday pay or a pension – especially if they are using a limited company. Therefore some of the financial service products they might need include a contractor pension, income protection, life insurance and critical illness insurance. They may also need a contractor mortgage.
Below you will find more information on the most popular financial service products for contractors and why they are needed.
A pension is a long-term, tax-efficient way of saving money for your retirement. Your pension fund will provide you with a type of income later in life and as such means that you will not have to work forever. Most permanent employees will have the option to enrol in their company pension scheme when they start a job, however this is not the case for contractors via a limited company. Umbrella companies are likely to offer their own pension service, but is this the best pension option? It is therefore important that contractors take it into their own hands and ensure that they are planning for this time in their lives as early as possible.
There are a wide variety of providers offering pensions with thousands of funds to choose from, however this can be a minefield if you don’t know what you are looking for. You need to be confident that you are investing in the most appropriate scheme and getting the returns you deserve while not paying too high a price for this. It is therefore advisable to speak to a contractor pension specialist who can ensure that you are getting the best scheme available for your situation.
Find out more about contractor pensions here.
Income protection insurance
If contractors can’t work for any reason they do not get paid, unlike permanent employees who usually get sick pay and holiday pay if they need to take periods of time off work. Income protection insurance can replace a large portion of your earnings and is designed to protect you in the event of an accident or illness which may result in a financial loss should you not be able to work for an extended period. A must for many contractors who need peace of mind that they will be able to pay their bills should anything happen to them.
When setting up your income protection policy you will need to think about how long you would be able to support yourself before the cover kicks in. This period of time is called the waiting period; the longer the waiting period, the cheaper the premium, but the longer you must wait before the insurer would start paying you. If you are unsure on the best policy for you it is always worth consulting an adviser.
Find out more about income protection for contractors here.
Life Insurance (or Relevant Life Insurance)
Life insurance is an essential insurance policy for contractors as it replaces the employee death in service benefits that you would potentially get as a permanent member of staff. It will pay out a lump sum on your death to clear a mortgage, pay off any outstanding debts, cover funeral expenses and even provide an income to your dependents to replace your earnings.
There is a plethora of different policy options available which include level term assurance, decreasing term assurance, family income benefit or a whole of life policy. Each differs in terms of what period of your life it covers, how much is paid out, how it is paid out and what it can be used for. It is always beneficial to discuss your options with an expert in order to choose the right policy for you and your family.
Find out more about life insurance for contractors here.
Critical illness insurance
Critical illness insurance is designed to pay out a tax-free lump sum of money straight into your bank account on diagnosis of a range serious illnesses; a time when you need it the most. This differs from life insurance which only pays out on death. The stress of unpaid bills is the last thing you need while recovering from a serious illness or undergoing treatment, so this can help contractors ease their financial worries and give them the reassurance they need to support themselves and their families financially should they become extremely unwell.
As with all insurance policies there are many different options, but with critical illness insurance it’s particularly important to check how much cover you need, how many conditions are covered in your policy and how long the term of policy will last. Again, an adviser can help you ensure that you have the best policy for your individual circumstances.
Find out more about critical illness insurance for contractors here.
Although a mortgage is not necessarily a perk of permanent employment, it is often much easier for employees to secure mortgages through the traditional routes and high street lenders than it is for contractors. Contractors are regularly deemed as higher-risk borrowers compared to PAYE employees, which means they can struggle to secure a competitive mortgage deal.
However the good news is that contractor mortgage specialists can help. They understand contract income, contractor affordability and the contractor lifestyle, and rather than go through the branch network they deal directly with specialist underwriters who are willing to accept short-term contracts as proof of income and will help you secure the best interest rate on your mortgage.
Find out more about contractor mortgages here.
We have partnered with a selection of specialist financial service providers who work with contractors to find the right products and policies for their individual circumstances. Find out more about our partners and what they can offer you or get in contact with them via our financial services directory.