5 ways contractors can save for retirement

As a limited company contractor, it can be tricky to prioritise saving for retirement as you navigate the day-to-day expenses of running your own business while looking to optimise your income-generation, writes Hrishi Kulkarni, managing director of iSIPP.

Contractor pensions. Why bother?  

If applicable, it is essential you join a workplace pension.

Or if not, strongly consider a personal pension, assuming -- that is -- you want to look after your financial future by adding an additional layer of financial security beyond the state pension (which is just £221.20 a week from April 6th 2024).

Pensions are an ideal saving method for retirement primarily due to the significant tax benefits.

The contributions you make to your pension are tax-deductible, allowing you to reduce your taxable income during your working years. Moreover, compounded investment growth will see your investment continue to grow tax-deferred (if investments perform well of course), until withdrawal, allowing for long-term growth and security.

Top four factors impacting the size of your pension

Factors impacting the size of your pension include:

• The length of time you have been saving for;
• The amount of money you have been able to invest;
• How well your pension has performed; and
• The amount of fees you have incurred to cover the provider’s services.

With those pension size influencers in mind, let’s now turn to 5 tips to help contractors like you maximise savings for retirement:

1) Start paying into a pension scheme as early as possible

As alluded to at the top, you won’t necessarily be eligible for a workplace pension scheme if you’re a contractor, so it is up to you to take the steps to maximise your savings for retirement.

First things first.

It’s a good idea to set a retirement goal, so you have something to aim for when saving for later life.

With a Self-Invested Personal Pension, for example, you can take your pension with you and manage it completely – even when you change to another job, or umbrella company.

Due to the potential which contracting has for periods of irregular income streams, paying into a pension as early as possible can help you balance out the leaner times and allow for investment growth over time, while still aligning with your retirement goals.

If you operate through a limited company, contributing through it can be more tax-efficient as your pension payments reduce your company profits and therefore your tax liability.

You are currently eligible to pay up to 100% of your earnings into SIPP up to a £60,000 annual allowance, assuming you have not already drawn any pension benefits.

2) Maintain a steady level of income

As you are likely already well-accustomed to managing your own finances, you will be aware of the minimum income level you require each month.

It may be tempting as a contractor to increase your salary during periods of business growth, but being able to increase your pension payments will help you reach your retirement goals faster.

That’s not to say that you can’t enjoy life now! But achieving a balance and focusing on the long-term goals will leave you in a stronger position come retirement.

3) Set up different saving strategies

Setting up a regular automatic contribution into your pension will eliminate the potential for missed payments if you manage it manually.

When you have access to an increased level of income, you might want to consider additional saving strategies to spread the risk and to provide flexibility of access as your circumstances change. You might want to consider cash savings accounts, Individual Savings Accounts (ISAs), Premium Bonds, buying property or investing in your business.

Like many contractors, your business itself may be your retirement plan. If this is true, you want to treat it as an asset and build it up over time to increase your potential profits when the time comes to selling it.

4) Select the best provider to meet your retirement goals

When selecting a pension provider, it is crucial you prioritise flexibility and adaptability to align with the variable nature of your income-generation.

 Consider a provider who allows you to adjust the way you contribute based on your changing financial circumstances.

And consider financially-secure providers that offer a diverse range of investment options to tailor your portfolio to your risk appetite, values and retirement goals.

5) Consider taxes – and our assistance

Understanding taxes and HMRC rules including allowances as a contractor can be daunting at first. But it’s important you familiarise yourself with your tax liabilities and start putting aside money for tax payments, so you don’t have to dip into  your savings to pay an unexpected HMRC bill at the last minute!

When selecting a savings account, make sure you chose a high-rate savings account to reap the benefits of additional interest, and check the very latest offerings because some will have one-off cash payouts as an incentive to join.

For reference, it might help you to know that at iSIPP, our approach is to go above and beyond to help you successfully manage your savings for retirement. With contractors in mind, we’ve developed an easy-to-use platform to hand you the control and flexibility to meet your changing circumstances. Retirement planning doesn’t have to be a daunting task and we’re there to ensure any headaches are minimised while all income is maximised.

Editor's Note: This article has been written and approved by iSIPP, a trading style of iPensions Group Limited which are authorised and regulated by the Financial Conduct Authority (FCA).