Contractors' Questions: What are my pensions options?
Contractor's Question: I currently have around eight years of corporate pension contributions from my full-time employee days, when I worked for a major bank, so my nest egg has been building nicely. However since I've been contracting for, say, the last four years, I've not been paying anything into the pot, opting instead to put money into paying of debts and using an ISA,
So what is the best way, for me, to go about sorting a pension? When it comes to pensions, is there a 'norm' among contractors with my circumstances? Are there efficient pensions options for people who are contract but were 'perm,' or is it best to just to keep putting money into savings?
Expert's Answer: It is a common misconception that pensions are a dying breed. Whilst this may be true for permanent employees, contractors have a lot to gain from pension investment. When it comes to retirement planning we hardly ever speak to contractors about long days on the golf course, instead it's all about the tax savings that pensions can offer!
As a contractor you can personally invest up to 100% of your income into a pension and benefit from income tax relief at your highest marginal rate, so for every £6 that you contribute, the government could be paying £4.
However, the real savings come in to play when you invest via your limited or umbrella company.
If you operate as a one-person 'Ltd' then you can get the company to fund a pension on your behalf. This allows you to continue drawing a tax efficiently low salary to reduce your national insurance, without missing out on the lucrative tax savings associated with pension investment. The company can invest up to £255,000 per annum which can significantly reduce your corporation tax bill, while transferring money from the company into personal hands.
If you are contracting through an umbrella company then the tax saving opportunities are even greater. You can now benefit from up to 48% tax relief on pensions contributions as the umbrella can contribute to a pension scheme on your behalf before you take your salary. This means you save on
national insurance, employers and employees income tax which can boost your retirement fund significantly. Some of our contractor clients choose to take the minimum wage and transfer everything else in to a pension in order to
keep more of their income out of the taxman's grasp.
The only argument against pension investment is that you can't access the funds immediately. However if you have already built up a savings buffer in an ISA, as you have, then this shouldn't discourage you. If you can afford to continue investing up to the ISA limit each year, and contribute to a pension fund, then this would offer you the safety net of savings to fall back on in the short term, while still benefiting you from the tax savings associated with pensions. Also, subject to minimum age, you can withdraw 25% of your pension straight away without having to stop benefitting from the tax savings available.
If you would like to discuss your pension options further with a ContractorMoney pensions specialist, please complete this form.
The expert was Tony Harris, managing director of ContractorMoney., an independent financial adviser to IT contractors.