What is a contractor pension?

To save you having to work forever, a contractor pension is a way of investing in your retirement future. HMRC offers certain tax benefits to those who wish to save for their retirement. This is to encourage everyone to take control of their retirement planning, rather than relying on state benefits. 

It goes without saying, the earlier you start to plan for this stage in life, the easier it will be. That said it is never too late to start. With each of us having different priorities and objectives, discussing when to stop working is inherently a personal matter. Here at Imperium-CS we are partnered with NEST pensions who are always on hand to give the best advice for every individual. 

The type of pension arrangement available is called a Money purchase schemes. This is where both you and your employer will make contributions. Under our Umbrella solution both contributions are deducted from the contract income before Tax and National insurance is calculated and therefore adding the benefit of a higher amount going into your pension pot. Under the Pension Freedoms Act of 2015, there are a variety of options available to you once you stop working. Beyond Imperium-CS making contributions on your behalf into your pension arrangement, we have no liabilities towards your savings, which means we advise that you review your pension a regular basis. This is easy to do when set up with NEST as they give you full access to your pension account.

Our obligations

Since February 2018, all employers must ensure that there is a pension scheme in place for all their employees. This is a relatively new piece of legislation called Auto-Enrolment and has been phased in since October 2012, as a way of the government addressing the growing number of adults reaching retirement age with no provisions in place. Employees, as long as they meet certain criteria, will be automatically enrolled into the scheme every 2 years and if they don’t want to join will have to manually opt out every time, they are re-enrolled.

As a contractor running your own LTD Company, you will not normally have to have an auto enrolment pension unless you have employees within the business. 

Tax on pensions for contractors 

When you start working on a contract basis there is higher level of risk and advise you manage your affairs in more detail than in comparison to when you were permanently employed. One of the main considerations is tax, and most of our clients ask us ways of, legally and ethically, reducing the amount of money they are going to give to the taxman. 

Broadly speaking there are 3 ways you can be remunerated, PAYE salary, dividends, or contributions to your pension. Pensions are a great way of reducing your tax liability as HMRC are keen for people to build up their own wealth for retirement and not rely on state provisions. As such, there are a few different ways of obtaining tax relief on pension contributions and it will depend on where the money is coming from.

Most of our Limited company clients reduce their corporation tax liabilities by making pension contributions as employer payments. Personal contribution tax relief is calculated slightly differently, so for further information please contact us so we can go through it with you.

Tax on dividends changed in April 2018. With your tax-free allowance reducing from £5,000 to £2,000 per year, this means that you will pay more tax on your personal income from your Limited (LTD) Company and contributing into a pension is therefore an even more appealing way of reducing your liabilities.

How much should I pay into my pension?

Although it is a question, we asked on a regular basis, there is no prescribed answer as one size does not fit all in this case. Everyone has their idea of a comfortable retirement, different levels of income and budgets which makes it impossible for us to answer that question as this all influences this decision and will come down to what level of contributions are affordable. This all needs to be assessed and professionally advised which is why here at Imperium-cs we do not offer advise but refer you to the professionals at NEST pension. I would like to point out at this point that Imperium-CS are able to arrange contributions to be paid to any pension provider so if you have a pension provider already and wish to continue sending your contributions to them we are more than happy to liaise with them to set this arrangement up at no extra cost.

As you may already be aware, there are limits to how much you can pay into a pension per year. The maximum is £40,000 per year, or up to 100% of your earned income, though it may be possible to carry this allowance forward for up to 3 years (a question to ask your chosen provider). The member of our welcome team that you are put in contact with will be able to amend the pension contribution amounts when they are putting your mock calculation together for you and will advise if the amount you have requested to be included is too high to avoid incorrect quotes being sent to you.  

Pensions are risk-based investments and as such their values are going to fluctuate. If at the start you have been well advised, then this risk can be managed. 

There have been some horror stories in the past of pension schemes collapsing such as Equitable Life. The regulator and authorities have learned from these mistakes and the institutional risk when investing in a money purchase pension is minimal. Even if the provider does collapse in the future, there are now compensations available via the Financial Services Compensation Scheme which will limit any losses realised by the individual investors.

What happens when I reach pension age?

In 2015, HMRC brought in the biggest change to pension income in a generation. They said that people should be able to choose how and when they receive their pension income. Prior to this, a structured annual income was put in place which was set for the rest of the retiree’s life. Now you have a choice of how you draw the income, and you can, with the right advice, use the funds to provide a tax efficient income which will suit your changing lifestyle. 

It was recognised that everyone will reach a certain age and stop working, some will choose to reduce the hours/ days they work or take on a more consultative role  and therefore their pension income should be more flexible to reflect this. Again, consult with your chosen pension provider will be able to go through these options with you in more detail.

What happens when I pass away?

This is always an awkward conversation but is an extremely important one to have. Under the new rules it is now possible for your chosen beneficiary to maintain your funds within, what is known as a pension wrapper which maintains its tax efficiency. If you were to die before the age of 75, there is also an option to receive the funds tax-free as a lump sum. It’s important to remember that your pension will not form part of your estate for Inheritance Tax purposes making them a very efficient way of passing on wealth to the next generation. 

How do I set up a suitable pension?

On the market today, there are a plethora of providers offering pensions with thousands of funds to choose from. If you are going it alone, you need to be confident that you are investing in the most appropriate scheme and getting the returns you deserve for the risk you can take, while not paying too high a price for this. You will also need to ensure that a pension is the correct vehicle for you, you are investing into the most appropriate name for your situation and that the ownership of the investment is correct.

If you use a professional financial adviser, they will take away a lot of the worry and headache in choosing where to invest and will be able to give you specific personal advice about how much you should be contributing. Advice may be a fee-based service but for that fee you will be given peace of mind and advice that is going to get you to where you want to be.

unbiased.co.uk have completed a study that shows that people who seek advice with their pensions on average receive an additional income of £3,654 for every year of their retirement (based on a pension pot size of £100,000).