Contractor Pensions

What is a contractor pension?

A contractor pension is an investment designed to provide income later in life. Following reforms over the last decade, pensions now serve as a significant, tax-advantaged savings vehicle — offering a secure income or the flexibility to draw what you need, when you need it.

HMRC provides tax reliefs to encourage people to fund their own retirement rather than relying solely on the State.

How contractors contribute

• From your personal money.
• As an employer contribution from your limited company.
• Via an umbrella using salary sacrifice.

Most limited company contractors contribute via their company (often the most tax-efficient). Umbrella contractors typically use salary sacrifice.

It's never too early — or too late — to begin. See how delaying can cost you, here.

Two main pension types

Employers' obligations (auto-enrolment)

Since February 2018, all employers must provide a pension scheme and auto-enrol eligible staff every three years as part of the government's push to improve retirement provision.

• Umbrella workers: your umbrella will offer an AE pension (salary sacrifice may not always be available).
• Limited company contractors: generally no AE scheme required unless you have employees.

Many contractors opt for a more flexible, non-AE arrangement due to irregular income.

Tax on pensions for contractors

Efficient remuneration usually blends PAYE salary, dividends, and pension contributions. HMRC incentivises pensions with reliefs; the mechanism depends on where the payment originates.

• Company (employer) contributions: usually most efficient for limited companies and can reduce Corporation Tax.
• Personal contributions: attract relief based on your income tax band.
• Umbrella salary sacrifice: can reduce both Income Tax and NI.

Dividend allowance: for 2024/25 the tax-free dividend allowance is £500, making pension contributions relatively more attractive.

How much should I pay in for a "comfortable" retirement?

There's no universal number. It depends on lifestyle goals, target retirement age, and affordability. A specialist adviser models scenarios and sets flexible contributions that can pause or scale with your contracts.

• Annual allowance: up to £60,000 or 100% of relevant earnings.
• Carry-forward: potentially use unused allowance from up to 3 prior years (subject to rules).
• Risk & capacity: portfolios should match your risk profile and capacity for loss.

Institutional risk is mitigated by regulation and the Financial Services Compensation Scheme (FSCS); some contracts have high protection levels (limits/rules apply).

What happens at retirement?

Since 2015's Pension Freedoms, you can choose how and when to draw income (e.g., drawdown, lump sums, annuities). Many contractors "glide" into retirement — part-time or consultancy — so flexible income planning is key.

What happens when I pass away?

Beneficiaries can often keep funds inside a pension wrapper for tax-efficiency. If death occurs before age 75, lump sums can be tax-free (subject to rules). Pensions are usually outside your estate for IHT purposes.

How do I set up the right contractor pension?

You can DIY, but choice overload (provider, funds, fees, ownership) is real. A regulated adviser tailors strategy, sets contribution levels, and monitors annually. Studies indicate advised consumers can be substantially better off over time.

Yolo Wealth specialises in contractor finances and offers an initial consultation at their expense.

Approver: Quilter Wealth Limited & Quilter Mortgage Planning Limited. 24th June 2024

Tax treatment varies according to individual circumstances and is subject to change.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.

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