Pensions represent one of the few last ‘tax breaks’ available to contractors, providing the opportunity to reduce your tax liabilities, whilst also saving for retirement.
Following significant changes introduced by the Government in April 2015, contractors now have the flexibility to decide how and when they draw their pension income, ensuring that their retirement strategy is suited to their personal circumstances and lifestyle.
Here we outline the current pension rules and the outline the options available from the age of 55, when pension funds can be accessed.
Contractor pension flexibility
Pensions now offer contractors increased flexibility at retirement, alongside the upfront tax benefits that they receive on their investments today:
- Each individual has an annual tax relief allowance, up to which pension contributions can be made in the tax year. This is currently set at the higher of £40,000, or 100% of total taxable earnings in the current tax year. Contractors can make employer contributions up to the £40,000 limit from their companies, regardless of the split between salary and dividend income. In addition, under current legislation, higher and additional rate tax payers benefit from full tax relief at 40% or 45%, but if they are a basic rate tax payer in retirement, they would be charged at a rate of 20% on income.
- Individuals wishing to make large one off contributions may be able to take advantage of ‘carry forward’ rules, whereby the unused pension allowances from the previous 3 tax years can be utilised to make additional contributions (currently up to £130,000). The individual must have been a member of a UK registered pension scheme in the years in question to be eligible for this, but does not have to have been an active member during this period.
- Pension income can be drawn from the age of 55, as a lump sum or regular income, without restriction, but subject to the individual’s marginal rate of income tax.
- A Pension Commencement Lump Sum (PCLS), also known as Tax Free Cash can be taken from any pension, usually up to a limit of 25% of each withdrawal. The remaining 75% can be taken as a regular income or lump sum and will be subject to income tax at the individual’s marginal rate.
- The traditional option of purchasing an annuity is still available and 25% PCLS can be taken prior to setting this up.
- Under Triviality rules, members of Final Salary schemes whose pension funds are valued under £30,000 have the option to take a lump sum, instead of a regular income. PCLS is available and the remainder is subject to marginal income tax.
- Upon death under the age of 75, any remaining pension funds can be paid out tax free to beneficiaries as either a lump sum or drawdown pension.
Make the most of the new contractor pension rules
Many people do not save sufficiently for their retirement and it is an unfortunate fact that a large proportion of today’s workforce will not be in a financial position to retire when they would like to, especially as they would not be able to rely on a state pension alone.
Any concerns that you may have about your ability to retire when you would like to can be alleviated by using the services of a Financial Adviser, who can tailor a retirement saving strategy around your personal circumstances and lifestyle goals.
A Personal Relationship
A Financial Adviser will take the time to get to know you and aim to truly understand ‘what makes you tick’, then they will talk you through the options available to you, to ensure that any decisions you reach are suited to your individual situation.
The options for retirement income are not just limited to pensions, but can include making use of alternative investments such as ISAs and buy-to-let property, which can be encompassed to provide a bespoke, tax efficient retirement strategy.
Contractor Pension Questions?
To find out more about your pension options, simply visit the Contractor Financials site. We have worked with Contractor Financials for over 15 years via our various business sites, and have used their services ourselves on many occasions.
Alternatively, you can call the team on 0333 370 8888.
The value of investments may fall as well as rise and past performance is not a guide to future returns.
Financial advice is given by Contractor Financials, which is a trading name of Contractor Financials Ltd and is regulated and authorised by the Financial Conduct Authority.