4 reasons why YOU need a contractor pension

You can either take the income as dividends and pay high rate income tax on everything you withdraw, you can apply for an ESC16 and take the money as 'captial' or you can invest in a contractor pension.

Most contractors are blissfully unaware of the tax breaks available when paying into a contractor pension, and fewer still are actually using contractor pensions as an effective means of tax planning.

So how to I save tax using a contractor pension?

Easy. Any payments you make are invested pre tax AND national insurance which means you effectively save 100% of your hard-earned money by investing in a contractor pension. Payments are usually made direct from your company bank account so once you've set-up a monthly standing order there's noting else to worry about.

Consider these benefits from a contractor pension.

(1) A higher rate tax payer using an umbrella company is taxed at 48%, meaning £48 for every £100 earned. What would you do - take £52 as income or invest £100 into a pension?

(2) For a limited company contractor in the higher rate tax bracket working 'inside IR35', the tax relief is approximately 40%. So that's about £60 as income or £100 into a pension?

(3) When you reach 50 (or 55 beginning 2010) you can start enjoying your pension benefits. You can opt to take 25% of your money in a tax-free lump sum at this age (or later if you wish).

(4) After age 50, you can leave the money in the fund to keep it growing, take a lump sum of 25% tax-free or skim some money out of the fund each year if you wish.

I love it - what do I do next?

The first step is to decide what option fits you best. If you are more of a risk adverse investor, have a look at stakeholder pensions, which are pretty much available to anyone. Up to £300 per month can be invested, while more than £300 can be invested based on age-related allowances. Stakeholder pensions have a 1% cap on the administration charges so you're not going to be paying over the odds for some random fund manager to drive around in his Ferrari.

For those seeking a more aggressive investment, you may want to turn to contractor pensions that allows you to invest in commercial property by purchasing an office or a shop

The next step in setting up your contractor pension is to choose a pension provider. You'll need one that has low set up costs, is flexible enough to reflect the likelihood that you will not always be a contractor, and a company that allows you to stop, start or cease contributions on a monthly basis. 

So that's it, contractor pensions in a nutshell. If you're keen on finding out more about setting up a contractor pension, why not head on over to our financial services section where a member of the team will be waiting for you to get in contact.

If you wish to be contacted about contractor pensions, please request a call back from one of our pension advisors.

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