One of the few things that contractors will miss when leaving the confines of office life to branch out on their own is a decent pension scheme. Along with a health plan and sick pay, a top rate pension is one of the few perks left for those working 9 to 5 in an office. Yet such pensions are also one of the things least likely to be considered important amidst the hurly burly of start up costs and new clients and finding your feet in the first couple of years working for yourself.
But what most consultants and contractors don’t realize is that pensions are one of the few areas that offer real advantages to the contracting sector over that of fixed employment. Whereas mortgages and other financial products cause great difficulties for the self-employed and for contractors, freelancers and consultants because financial institutions are loathe to loan money against what they consider uncertain income, pensions offer excellent investments for the freelance and consulting sector. This is because pensions allow Umbrella and Limited Companies to make pre-tax deposits into your pension (as well as before declaration of profits) and this remains valid even if your income is deemed to be subject to IR35 legislation.
For contractors then pensions serve a double purpose. Firstly they offer the standard use – that of an income to live on in retirement. In addition to the very basic state benefit schemes which provide an extremely limited and paltry income a private pension scheme fund enables you to provide yourself with a comfortable income in your retirement years.
There are any number of pension schemes to examine, from occupational pensions, personal pensions, stakeholder pensions as well as executive and stakeholder pensions and self-invested personal pensions schemes (SIPP). But for those in the freelance community the most important thing is to make sure they look for specific contractor pensions.
Contractor pensions have the advantage of flexibility and an ability to fit in with any change of direction in your career. They can be used while you are contracting as well as when you are in fixed employment. Similarly they can be used when you are working as a sole contractor and can be part of your Limited Company, an Umbrella Company or most other tax solutions. Contractor pensions allow you to remove a lump sum at the age of 55 completely tax free to retire early, or alternatively you can also remove up to 25% of the pension at the age of 55 to purchase an annuity, as well as being able to add to the fund from any future earnings. This is a massive advantage of contractor pensions, that you can retire when you choose to, either as early as you want or as late as you want, rather than when a company or financial institution tells you to retire!