Provided in association with contractor services provider Coulson Prichard Associates (01480 470220) and IFAs ContractorFinancials Ltd (0845 062 8888 quoting Shout99).
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 whether inside and outside of IR35 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. If caught by IR35, you save not only the income tax that would ordinarily be payable but you also avoid the employers and employees national insurance contributions. The amount of tax relief can be as much as 49 per cent meaning that for each £100 invested you pay £51 and the tax man pays the rest.
For those outside of IR35 you can will pay 19 per cent or 32.5 per cent on dividends yet benefit from 22 per cent or 40 per cent tax relief when investing personally into a pension.
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.
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. Takeovers and mergers cannot be predicted with 100 per cent certainty but we attempt to recommend providers with the financial strength to remain the steward of your investment throughout your life- continuity is key as fund managers often walk in the event of take-overs and there are many investors who remain languishing in closed funds where providers have not had the financial muscle to remain in the market.
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 at the bottom of this page.
'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 was updated to just one set of tax rules for all types of pension, with an individual Lifetime Allowance (£1.8 million 2011/2012).
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 allow a massive investment of up to £50k pa irrespective of salary.
There will also be a number of other changes including:
- Up to 25 per cent Tax Free Cash is available on many schemes once you reach 55
- New and more flexible options at retirement including the freedom to defer purchasing an annuity- indefinitely if required so no need to 'secure' benefits with a rigid annuity by age 75 as at present.
- Earliest retirement age now 55
- 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 below.
The annual limit is now £50,000 and the lifetime allowance is now £1.8 million (2011/12). The age at which you can release a tax free lump sum of 25 per cent of your pension has also increased and is now age 55.
Please Note: ContractorFinancials is a trading name of ContractorFinancials Ltd which is directly authorised and regulated by the Financial Services Authority (FSA).
The value of investments may rise as well as fall and past performance is not a guide to future returns.
Not all products are regulated by the FSA e.g. buy to let mortgages.
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