Self employed? Build a financial safety net

QUITTING the nine-tofive and becoming your own boss is a dream for many – and in recent years more workers than ever have been taking the leap. There are more than four million self-employed workers in the UK, while the number of small businesses rose by 8 per cent in the second quarter of this year, compared with the same period in 2020. However, when you shift to self-employment, you lose the financial safety net that an employer provides if you fall ill and cannot work.

That doesn’t mean your financial wellbeing is in jeopardy – you just have to protect yourself.

Save for a nest-egg

SELF-EMPLOYED incomes tend to fluctuate, in contrast to the regular monthly pay cheques that employees receive.

To help you smooth over the peaks and troughs in your earnings, try to build up a nest egg.

Put the money in an interestearning savings account that is easily accessible.

Take out cover

IF YOU are unable to work for more than a few months, savings are unlikely to be sufficient to live on. After all, statutory sick pay is not available to self-employed workers – only to those with an employer.

You will need to find an alternative way of covering your mortgage or rent and other essential costs. This is where insurance can prove invaluable.

Critical illness cover pays a lump sum if you are diagnosed with certain serious 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 taking out life insurance.

Income protection pays out a proportion of your income if you cannot work due to poor health or an injury. Most policies cover coronavirus and the effects of long Covid.

Maintain income

INCOME protection tends to pay out between 50 and 70 per cent of your regular income if you cannot work, either for a set period or until you reach retirement age.

When you’re self-employed, proving an accurate assessment of your income to an insurer can be tricky. However, a rising number of policies are designed specifically with fluctuating incomes in mind.

The insurer LV= launched a mortgage and rent cover policy last month for self-employed and flexible workers providing up to £2,000 a month for a maximum of two years. You don’t have to work a certain number of hours or show proof of income to be eligible, but the benefit must be no higher than your housing costs.

Breathing Space from British Friendly works in a similar way and pays up to £250 a week. It doesn’t have a minimum working hours requirement, but policyholders need to prove their income. Other policies require people to work a minimum of 16 hours a week, but are designed for those without a regular income.

Short-term policies include Nationwide’s Illness and Injury Insurance, Aviva’s Living Costs Protection, and Mortgage Safe from MetLife.

What it costs

THE price of income protection is based on factors including your age, profession, lifestyle and health.

For example, a 32-year-old could pay between £14 and £35 a month for £1,000 a month of cover until they retire, while a 45-year-old could pay between £20 and £70 a month for £1,500 a month of cover, according to insurance broker LifeSearch.

You can often lower monthly premiums by delaying when the policy starts to pay out. This may be a good option if you know you could cover your expenses out of your savings for a few weeks or months.