Which Provider
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% 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% 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.
Pensions Simplification
'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 has been updated to just one set of tax rules for all types of pension, with an individual Lifetime Allowance (£1.5 million 2006/2007). This lifetime limit will rise by preset amounts for the next 5 years and look likely to be increased beyond this date.
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% of their salary into a pension. In addition the rules regarding funding a pension scheme direct from your limited company appear to allow a massive investment of up to £215k pa irrespective of salary yet in reality it now looks as if these freedoms will be difficult to exploit in practice. For a substantial 'employer' contribution to be allowable for tax relief, the final authorisation will potentially lay with the Local Inspector of taxes which implies that the new rules will trigger unwelcome interest from the taxman, something many contractors may find unpalatable. Clearly this means that, ironically, the previous restrictive yet clear-cut percentage based rules may be replaced by more freedom in theory with less certainty in practice that an investment is allowable.
Our general advice for those inside of IR35 is to make more modest company sponsored investments for now and then up the ante when the new rules have been seen working in practice. For those outside of IR35 with a lower salary we discuss with clients the option of personally funding up to 100% of salary and then making employer contributions in addition.
The 'A' Day rules will certainly make pensions much simpler for most of investors and there will be a number of key advantages for our clients in the new regime:
- Many contractors could have greater flexibility in the size and timing of their contributions.
- In many cases, there will be no need to make contribution checks on personal investments.
- There will be greater investment flexibility i.e. collective investments into property (although sadly not directly into residential bricks and mortar as originally planned)
- Up to 25% Tax Free Cash will be available on many schemes which did not allow tax free elements i.e. funds from contracting out of the State
- Second Pension and SERPS
- Being able to take smaller pension funds as a one off lump sum as opposed to having to draw a regular income (known as triviality rules)
- New and more flexible options at retirement including the freedom to defer purchasing an annuity- indefinitely if required
- No need to 'secure' benefits with a rigid annuity by age 75 as at present
There are also be a number of other changes including:-
- Earliest retirement age rising from age 50 to age 55 from 2010
- Full concurrency i.e. being able to pay into any array of plans you wish (currently many occupational pension holders are unable to enhance benefits with a personal/stakeholder pensions)
- The ability to pass pension funds onto future generations using
- 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 seem 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.
As independent advisers we are pleased to confirm that we can make recommendations from providers from across the whole market. We are happy to point out that we can work on a commission or fee basis and that any initial discussions will be free of charge.
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Financial advice on these pages is being given by FreelancerMoney, which is a trading name of ContractorFinancials Ltd and is regulated and authorised by the Financial Services Authority.
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