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The LGBT community contains more than its fair share of entrepreneurs. Almost every week I talk to someone who’s thinking about quitting their job and setting up their own business. And that’s really great. It’s good to see people taking a chance and pursuing their dreams.
But, of course, before taking such a huge step, you have to think carefully about the financial consequences. Giving up the suit and the commute is all very well, but you may also be giving up the sick pay, paid holidays, company pension scheme and a raft of other benefits that your current employer provides. If you’re self-employed, you have to provide this protection for yourself.
Money’s likely to be tight when you start working for yourself, so you need to prioritise. You could spend a fortune on different types of insurance but you really need to think what is most important. My view is that an income protection plan is essential for self-employed people. With this type of plan, if you are unable to work because of illness or injury, the insurer pays a replacement income. There is a deferred period before the policy kicks in but once this has passed, the policy will continue to pay until either you are able to work or the policy lapses at your chosen retirement age. Some plans also have automatic hospitalisation benefit, which will provide an income if you are hospitalised for 8 days or more during the deferred period.
The big advantage of income protection policies is that they don’t stop paying the benefit after 12 or 24 months, as mortgage payment protection policies usually do. Therefore, if your illness is so severe that you can never work again, the policy will pay until age 60 or 65 or whatever retirement age you chose at the outset. You can also arrange it so that the benefit payable under the policy increases every year by the rate of inflation or by a set percentage – that way the benefit will keep its real value.
The other matter you need to consider is a pension. I know many newly self-employed people put this on the back burner – it’s something they’ll get round to eventually when their business is established. The trouble is that sometimes they don’t get round to it at all. The sooner you start putting money by for the future, the better. And remember, if you are self-employed, you don’t qualify for the State Second pension – you only get the basic State pension. The basic pension is currently £82.05 per week and it is widely expected that, as it is not linked to increases in average earnings, it will continue to lose real value over the years.
Some years ago the Government introduced stakeholder pensions to encourage people on low to medium earnings to save for their retirement. Unlike some earlier personal pension arrangements, these have low, transparent charges – the maximum a stakeholder can charge is a 1% annual management charge. So, get saving!
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