Pensions for contractors
If you've not already set up a pension or don't currently make full use of the allowances available, you could be paying substantial amounts of tax unnecessarily. Pensions are big news as they represent one of the few remaining tax breaks available to contractors.
You can invest money personally from your own funds or direct from your company bank account.
Having decided to exploit the tax breaks and invest for the future, the key to maximising benefits is to ensure that you make your investment with a pension provider who can meet criteria that are vital to contractors and smal business owners.
As specialist IFAs looking solely after contractors we understand that it is important to avoid companies that levy initial set up costs (this ensures that 100 per cent of your contribution goes into your pension which is crucial given the fact that your employment status may mean that you do not fund the scheme continuously for the rest of your life - in this way even funding for a relatively short term makes sense as you have not burdened your investment with upfront fees and charges).
Any pension also needs to be flexible enough to reflect the fact that as a contractor your employment status is inherently changeable and you must have complete freedom to increase, decrease ,suspend, restart and cease contributions completely -literally on month by month basis. Any pension must be versatile enough to allow contributions regardless of whether you continue to work through a one-man limited company/umbrella company, are between contracts or a permanent employee.
The scheme must also be with a institution that has the financial strength and backing to remain the steward of your fund for the long term. Our concern as advisers is that we watch newer entrants come and go and so it is vital that any provider has a good track record and has made the long term commitment required.
Because we are have a wealth of experience in the field of looking after contractors we understand how to fully exploit tax rules etc that are little understood by more general advisers/direct providers to ensure that you get the best possible benefit from your time as a contractor.
It is important to understand that these investments are longer term in nature and that the value of investments and income from them can fall as well as rise. Past performance is also no guarantee of future performance.
If you would like to discuss your pension options further please complete the our pension finder below.
'A' Day (Appointed day) arrived on 6th April 2006 and brought with it sweeping and radical changes for contractors looking to invest in a pension - either via a one-man limited company or personally.
After this date the complex web of eight current pension regimes has been updated to just one set of tax rules for all types of pension, with an individual Lifetime Allowance (£1.5 million 2006/2007). This lifetime limit will rise by preset amounts for the next five years and look likely to be increased beyond this date.
Unlike the previous restrictive rules that limited pension investment to a set percentage of salary, contractors will personally be able to place up to 100 per cent of their salary into a pension. In addition the rules regarding funding a pension scheme direct from your limited company appear to allow a massive investment of up to £215k pa irrespective of salary yet in reality it now looks as if these freedoms will be difficult to exploit in practice.
For a substantial 'employer' contribution to be allowable for tax relief, the final authorisation will potentially lay with the Local Inspector of taxes which implies that the new rules will trigger unwelcome interest from the taxman, something many contractors may find unpalatable. Clearly this means that, ironically, the previous restrictive yet clear-cut percentage based rules may be replaced by more freedom in theory with less certainty in practice that an investment is allowable.
The 'A' Day rules will certainly make pensions much simpler for most of investors and there will be a number of key advantages for our clients in the new regime:
- Many contractors could have greater flexibility in the size and timing of their contributions.
- In many cases, there will be no need to make contribution checks on personal investments.
- There will be greater investment flexibility i.e. collective investments into property (although sadly not directly into residential bricks and mortar as originally planned)
- Up to 25 per cent Tax Free Cash will be available on many schemes which did not allow tax free elements i.e. funds from contracting out of the State Second Pension and SERPS
- Being able to take smaller pension funds as a one off lump sum as opposed to having to draw a regular income (known as triviality rules)
- New and more flexible options at retirement including the freedom to defer purchasing an annuity- indefinitely if required
- No need to 'secure' benefits with a rigid annuity by age 75 as at present.
There are also be a number of other changes including:-
- Earliest retirement age rising from age 50 to age 55 from 2010
- Full concurrency i.e. being able to pay into any array of plans you wish (currently many occupational pension holders are unable to enhance benefits with a personal/stakeholder pensions)
- The ability to pass pension funds onto future generations
- Greatly increased scope to provide for life insurance with tax relief on premiums.
It is important to understand that even now some of the details regarding the application of these new rules are not yet fully finalised and there may well be further changes to the mechanics of how contributions are allowed for instance. It does seems fair to state, however, that pension investment will allow far more freedom in future, with greater possibilities for tax savings, enabling contractors to build a better nest egg towards a prosperous retirement.
If you would like to discuss your pension options further please complete the our pension finder above.
Provided in association with contractor services provider Coulson Prichard Associates (01480 470220) and IFAs ContractorFinancials Ltd (0845 062 8888 quoting Hardhatter offer).
Note: Investment Advice on this site is provided by Contractor Financials who are regulated by the Financial Services Authority (FSA).
The Editor © Hardhatter 2006