With pension plans getting so much coverage in recent news many people will obviously be thinking about their own plans for retirement and how their finances will affect them.
For contractors, pensions are important things to consider, especially as they offer some attractive tax breaks that are not necessarily available to those employed by a company on a full-time basis.
Making contributions to your pensions will largely be your own responsibility. In order to work out how much to put into your pension pot every year you could use an umbrella company calculator.
There are numerous options available to contractors and it is important that you choose the one that suits your needs and lifestyle best.
Personal/ Stakeholder pension
This is a very common option for self-employed people who do not have access to a workplace pension scheme. They are effectively private pensions that you set yourself. These can usually be accessed at the age of 55, you also don’t have to be retired to claim these.
Usually a contribution up to £300 per month is allowed into such schemes – any higher than this and certain age related allowances come into effect which are based on annual salary and any benefits you may pay tax on.
This type of scheme would predominantly benefit someone running their own limited company. HM Revenue and Customs set allowances that relate to salary and age, these take into account issues like marital status, previous pension history and the length of service with your limited company.
Positives for this plan are that there is the greater potential to invest with these factors taken into account. However, they are tied more rigidly to your limited plan and providers can charge excessive administration fees to maintain such a plan.
Executive pensions plans generally give contractors more control. They allows you to set your retirement date and the amount that you contribute.
Significant tax advantages are available to those who use an umbrella company to process their finances. According to SJD Accountancy, a contractor working through their own limited company can redirect a portion of their gross salary into a pension plan and save on personal and corporation taxes.
Those outside IR35 legislation can place the majority of their gross income into a pension plan and claim tax relief on the amount deposited from a personal or company bank account.
Contractors who are inside IR35 (such as those who work through an umbrella company) can save on income tax and avoid the National Insurance Contributions. Tax relief in this case can be up to 45 per cent.
Technically what this means is that if the more money you invest into your pension each year, the higher the tax relief will be. You would normally pay tax on your income but by investing your income into a pension you can save most of the tax you would usually pay.
As contractors generally take the majority of their pay from dividends, they can invest larger amounts of their base salary into a pension plan allowing for these tax breaks.
Investing in a pension early can help contractors retire much earlier due to the amount they have saved in the long run.