How contractor pensions work: A step-by-step guide

As a contractor, you're likely to be adept at managing your finances. But once you recognise the importance of saving for retirement, it is key to start planning early, so you can understand your options and if suitable, leverage advantages offered by saving into a personal pension.

Here, exclusively for ContractorUK, let’s breakdown how contractor pensions work, with a step-by-step overview of contractor pensions including key considerations for retirement saving, writes Hrishi Kulkarni, managing director of iSIPP.

Choose a pension provider

Most contractors tend to want to select a provider that offers:

  • Flexibility and control (to accommodate their individual needs);
  • Contributions to be flexible and variable based on financial circumstances.
  • An accessible online platform for fund management 24/7, alongside investment options which are aligned with your risk tolerance, values, and retirement aspirations.

First up, review the schedule of fees and make sure the pension provider is transparent in what they will charge you. Avoid providers with any hidden charges.

Ensure the pension provider offers an ‘end-to-end solution’ and keep in mind they can offer you a full range of retirement drawdown options.

Next, make sure the pension provider is authorised and regulated by the Financial Conduct Authority (FCA). Also, you want your savings protected under the Financial Services Compensation Scheme (FSCS).

Select the right pension type

A personal pension offers several benefits to contractors.

A SIPP (Self-Invested Personal Pension) offers greater flexibility of investment choices and control of the investment decisions you can make, than a stakeholder pension or work place pension -- where you have less choice and control over where your money is invested.

For those operating through a limited company, a personal pension offers significant tax advantages.

Any pensions contributions made through the limited company are treated as an allowable business expense. This can reduce your company’s tax liability where there are sufficient profits to do so.

Determine savings amounts

At this stage, with your limited company contributing to your nest egg, you’ll likely want to have a handle on how much, financially, you can expect.

Well, how much to save for retirement depends on a range of factors such as your retirement needs, age when you start saving, among other factors.

Inside or outside a cost-of-living-crisis, starting to contribute early is important.

Consider pensions efficiencies, the carry forward rule, limited company tax efficiencies

Remember, contributing into a SIPP is one of the most tax-efficient ways to build assets for your future income needs in retirement. Individual contributions qualify for basic rate tax relief.

High earners can claim additional rate tax relief through self-assessment. If you have not already drawn any pension income, you can currently contribute up to 100% of your relevant earnings up to a maximum of £60,000 a year (known as the annual allowance), into any pension scheme to receive tax relief. You can carry forward any unused annual allowance for up to three years in respect of the threshold mentioned above.

Planning contributions, especially during higher earning periods and leveraging tax-efficient methods if working through a limited company, are key.

Next, play the long game

The option to access your pension from the age of 55 (rising to age 57 from 2026) offers flexibility. But go easy once you’re granted access! It's imperative that you build sufficient retirement funds for your most senior years.

Similarly, with recent changes to the pensions Lifetime Allowance (LTA), building assets in a pension should form part of your Inheritance Tax strategy. Your aim here is mitigate tax/ HMRC liabilities when passing on assets to your beneficiaries on your death.

Consolidate existing pensions

Previously, you may have been working in a full-time employment, or as a contractor, you may have been (or currently are) working with an umbrella company. In either case, your employer is required to enrol you into their workplace pension. If you have a collection of previous workplace pension schemes, then streamlining your retirement planning by merging current pensions into one new personal pension:

  • simplifies management;
  • improves visibility of fund performance;
  • enhances investment strategy cohesion; and
  • potentially offers time and (some) cost saving.

You can ask your umbrella employer to make your employer and employee pension contributions to your own personal pension account. However if your umbrella company offers a ‘salary sacrifice’ arrangement into a scheme which the umbrella company has chosen, this will offer the greatest tax savings.

Regular investment review and adjustment

To ensure your investment performance and contributions align with your retirement goals, it is recommended that you perform regular reviews as you enter different stages. Run this review, too, when changes to your life and circumstances occur.

But be aware - most pension providers are unable to provide you with financial advice. At any stage if you are unsure, it is recommended that you seek professional independent financial advice. Also widely acknowledged to be helpful is a 60-minute appointment with Money Helper.

Retirement phase

Managing personal pensions in retirement can be straightforward, with your provider guiding you through available options, though you need to consider your withdrawals carefully to not deplete your entire savings too quickly! At the same time, you’ll also want to mitigate the tax you pay to HMRC when you make withdrawals.

Who we are, and why we know about contractor pensions step-by-step

We at iSIPP would like to emphasise that retirement planning should not be compromised. Very familiar with contractors, our business offers an end-to-end Self-Invested Personal Pension solution, providing flexibility on individual contributions.

And for your reference, we can accept contributions from your umbrella employer; provide opportunities for you to consolidate existing pensions into one iSIPP account, and provide investment options with a user-friendly platform to boot - tailored to your needs as a contractor. With FCA authorisation and regulation, high security, and FSCS protection, your investments are securely managed. Want the finer details? Find out more and visit us online at

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).

Monday 11th Mar 2024
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Written by Hrishi Kulkarni

Hrishi Kulkarni, managing director of iSIPP, is a technology enthusiast with over 20 years’ professional experience. He’s dedicated to bringing a customer-first approach to the ever-evolving world of pensions and retirement. He is committed to making technology accessible and impactful for all pension savers providing the simplicity, transparency, and control to help individuals manage their retirement goals.

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