A Guide to Contractor Pensions
As a contractor, you’re probably used to managing your own money, so you may be considering a pension fund that allows you the same freedom. Or perhaps you’re interested in investing your pension pot but don’t have the time to manage the fund yourself?
Whatever your pension preferences, we’re here to help you understand your options as a contractor and how they could affect your future finances.
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We’ll match you with one of the independent financial advisers we work with. Make an enquiry or call 0808 189 0463 for a free, no-obligation chat.
Contractor pensions explained
If you’re a contractor, you won’t benefit from employer contributions, so it’s important to save for your pension as early as possible, to maximise your retirement pot. Contractor pension funds are usually private pensions.
These are a type of defined contribution pension scheme where the fund you build up for retirement consists of regular contributions you make throughout your working life, as well as the performance of the underlying investments.
One of the main benefits of a contractor pension is the additional tax relief on each contribution, based on your marginal rate of income tax. In fact, you can invest up to £40,000 each year or 100% of your total income (whichever is lower) and still receive tax relief from the government
What pension schemes are available for contractors in the UK?
There are a number of different types of personal pensions available for contractors and, depending on your circumstances, you may be eligible to open a fund and start contributing. Private pensions can offer varying levels of flexibility – something that may be very helpful if you have unreliable or fluctuating income. Let’s take a closer look at the type of personal pensions you could consider:
- Stakeholder pension. Money contributed into a stakeholder pension can be invested into stocks and shares and then a percentage of the profits are paid back into your fund. A benefit of a stakeholder pension is that charges are usually lower than other types of retirement plans and there are flexible and minimum contractor pension contributions.
- Self-invested Personal Pension (SIPP). Those interested in investments can be pleased to know that this type of pension can provide more choice regarding how and where your money is invested. Although the costs of running a SIPP can be higher, so can the returns available. With the flexibility of how your pension fund is invested, a savvy contractor could benefit from higher returns from money invested for retirement. Some SIPP contributors assign a fund manager to oversee their investments and to guide them with strategic advice.
If you’d like to know more about the different types of pensions available for contractors and talk to an expert about which option may be best for you make an enquiry and we can arrange for an advisor we work with to get in touch.
How much pension should I save as a contractor?
The average pension income in the UK is £216 per week. For many people, this sum might not provide the level of comfort and financial freedom that they need so, unsurprisingly, we’re commonly asked about how much is needed to be saved to achieve a healthy pension pot. The financial needs of any given individual may differ heavily from another, which is why it’s important to sit with a pensions advisor and work out how much you want to save and the best way you can achieve that end goal.
How can I calculate my ideal contractor pension contributions
Many pension providers will advocate saving as much as you can reasonably afford towards your pension. However, ideally you should have an idea of how much income you would like to have in retirement and use that figure to work out how much you should be saving each month to reach this goal.
In an ideal world this is easily done, in reality you will also have to factor in what is truly feasible in terms of how much you can afford to put away each month. To get help understanding what you would need to be saving to achieve the retirement income you would like, talk to one of the expert advisors we work with.
The amount you can save, the type of pension investment you make and the performance of your pension fund will all play a vital role in the income you achieve at retirement. Make an enquiry for a free, no obligation chat and we’ll match you with one of the independent financial advisors we work with.
Should I use a contractor’s pension calculator?
Online contractor pensions calculators can be handy for a quick overview of how much you should expect to pay each month for your pension.
However, keep in mind that online tools won’t take other factors into consideration such as:
- State benefits you may be entitled to
- Other pension contributions you may have made throughout your working life
- The value of pension benefits
- Any interest earned through your pension scheme
- Tax relief
To get a realistic idea of how much you should save based on your current circumstances and end goal, talk to a pensions expert who can calculate this for you. Using their wealth of knowledge regarding the various pension products and schemes, they can calculate which option is best for you and how much you can expect to have saved by the time you retire.
Are there pensions for contractors with a limited company?
Yes, there are various pension funds that may be available to you as a contractor with a limited company. In fact, trading as a limited company can have further tax advantages which is great news if you want to build your retirement pot.
I’m an IT contractor with a limited company, should I pay into a pension?
As a contractor with a limited company, whether in IT or any other industry, you need to prepare for your retirement.
You might not have another pension fund to enable you to enjoy the retirement you have in mind, so saving is advisable. It’s always best to check with a professional ahead of opening a pension but depending on your circumstances as an IT contractor, it may be beneficial to contribute towards your pension through your limited company.
Making contributions as both an employee and employer can also reduce your company’s overall tax liability. Deciding where to open a pension fund can be complex and, in order to ensure you’re utilising the tax advantages for limited companies, it can be helpful to have an expert guide you.
A pensions advisor can provide tailored advice for IT contractors and can also calculate how much you should pay for your contractor company pension contributions each month.
Is there an auto-enrolment pension for limited company IT contractors?
If you were a full-time employee as opposed to a contractor, your employer may automatically enrol you into their pension scheme.
This can be financially beneficial as in the UK, employers are legally obliged to contribute into your pension. As a contractor, you don’t have an employer to fall back on to provide additional contributions towards your retirement fund.
So it’s all the more important for you to ensure you regularly monitor your ongoing pension provision. If you’re unsure about your options, talk to a UK pensions expert and learn more about the best contractor pension plans for you.
I’m a contractor with employees, do I have to contribute towards their pensions?
If you are a contractor with employees, you are legally required to auto-enrol them onto a workplace pension scheme if they fit the following criteria:
- Aged between 22 and the state pension age
- Resident in the UK and eligible to work
- Have gross annual earnings in excess of £10,000
If you feel unsure about how to set your employee’s pensions up or which pension fund to opt for, contact a pensions advisor who can guide you through the process.
Pension tax relief for contractors
As a contractor, it can be helpful to know how you can maximise your tax relief pension contributions. While there is no limit as to how much you put into your pension each year, there is a limit on the amount that will benefit from tax relief.
This limit is called the annual allowance. For the 2019 – 2020 tax year, the annual allowance is set at £40,000. Any pensions savings you make above this amount won’t get tax relief. However, it is possible to carry forward any unused annual allowance from the previous three years.
The government will add at least 25% in pension tax relief. So, for every £100 invested, the government will add £25. If you want to understand more about how tax relief could affect your retirement fund, make an enquiry to talk to one of the expert advisors we work with.
Does a contractor pension have any contribution limits?
There are no limitations when it comes to how much you can pay into your pension, however to qualify for tax relief the contractor maximum pension contribution cannot exceed £40,00 a year (capped for 2019-2020).
I have an IR35 pension – how does this affect my tax relief?
As a contractor, you may be considered as an employee of your end client. For tax purposes, you will be subject to PAYE. This can be frustrating as this could mean that you pay a higher level of tax in comparison to the tax charged if you had been classified as a sole trader.
Additionally, if you sourced the work via a recruitment agency, they will usually be required to deduct your tax and NICs for you. This could significantly reduce your income but there may be another option for you, depending on your circumstances.
If you’re a contractor, you could divert a proportion of your gross income directly into a pension scheme. IR35 allows contributors a 5% expenses allowance and the good news is that pension contributions sit outside of this.
Therefore, rather than have that income taxed according to IR35’s rules, you could save your money into a pension for later down the line. The rules regarding IR35s can seem complicated, so it’s best to seek the help of a pensions professional who can help you navigate through the process.
How do you pay into your contractor pension?
Upon setting up your contractor’s pension, you will agree how much you can contribute into your fund each month.
Depending on the type of pension fund you have and whether it is investment linked or not, you may be able to invest part of your fund to increase your sum.
Setting up and understanding how to manage a contractor pension can be a lot easier with the advice of an expert. Working with a pensions expert can also be a great opportunity to ask any questions you have and to also raise any issues or concerns you have about your future finances.
Who are the best contractor pension providers?
Not every contractor pension scheme will be suitable or necessarily ‘the best’ pension option for everyone.
Every pension provider is different and will have varying terms that could affect the rate you are able to save at.
Therefore, you should always seek professional advice before agreeing to a contractor pension as having an expert on your side can help you find the most financially beneficial and affordable fund for you.
How to differentiate between contractor pension providers
A great way to compare contractor pensions is to look at:
- The benefits associated with the scheme
- Fund management charges (if applicable)
- Transfer funds (if you decide to transfer your pension)
- Any other associated charges and when you’ll be expected to pay them
- The flexibility of payments – Do you have to make regular payments or can you decide to pause them if you experience a drop in your income?
- What choices you have around how and when your money is invested
Is there anything I should consider before I open a contractor pension?
Before you decide to open a pension fund, think about:
- How much you want to save
- How much you can afford to contribute
- The level of risk you are willing to take with your money. A lower-risk investment may be more suitable for you if you have a limited income and no other pension fund)
- How your pension could affect any future benefits that you may be entitled to
- The changes you might need to make to live comfortably during your retirement
Speak to a pensions expert
If you want advice about setting up a contractor pension to ensure you have enough income in your retirement, talk to one of the expert advisors we work with.
All the experts are independent financial advisors with access to all the pensions and providers in the market.
Call 0808 189 0463 or make an enquiry and we’ll match you with an expert in contractor pensions.
They’ll be happy to answer all your questions and make sure you have all the information you need to help you decide the best way to make provisions for your best retirement years. The service we offer is free and there’s absolutely no obligation.