For those consultants and contractors just starting out in the freelance sector the last thing you normally want to be thinking about is your pension. You’ve just made an exciting break from either your old career or perhaps you’ve just launched your own business straight from college or university? Either way most people are more interested in getting the business established and in earning some immediate cash rather than thinking 20 or 30 years into the future.
This however is a mistake. Right from the outset you should be planning your pension, not because you are an overly prudent and cautious person, but because for consultants, contractors and freelancers the pension is one of the best and most tax efficient ways of investing their earnings without the government taking their usual massive share.
The first reason that pensions are so tax efficient for contractors is that in most other fields, contractors are penalized. Try getting a good mortgage deal as a freelance worker and you’ll soon experience this. But with pensions your Limited or Umbrella Company can put cash into your pension before paying tax and before declaring profits. This applies even if you come under the much-detested IR35 legislation – you’re still allowed to pay into a pension before tax is deducted.
Secondly, contractor pensions are known to be extremely flexible and adapt to whatever turns your career takes. You can form a contractor pension from the pension you started whilst in fixed employment and can take it on through your freelance career as well as if you decide to work under a Limited Company or Umbrella Company.
Thirdly, you can, should you so wish, take out a large lump sum, free of tax, at the age of 55 if you want to retire early. At 55 years old you are allowed to take out 25% of the pension and then use the rest to either buy an annuity or you can also top up your fund from any future earnings you might make.
This is because contractor pensions allow you the flexibility to decide for yourself when you want to retire as opposed to company schemes in normal fixed employment that only allow you to retire when they say so!
Finally, it is worth noting that these days, pensions are a safe investment. There are now extremely strict rules in place to make sure pension firms don’t lose your money!