Contractor Pensions Explained

15 August 2023

As a limited company contractor (PSC) you will need to consider investing in a personal pension.

Here we answer your pension questions.

retired couple in deck chairs on beach

1. How do personal pensions differ from workplace pensions?

The main difference between a personal pension and a workplace pension is that generally, you have far greater control over how much you pay in, and how the monies are invested within the fund, with a personal pension generally giving you much more flexibility and choice.

2. How do I decide if a personal pension is right for me?

This would be based on personal opinions such as appetite for risk, ability to take risks and your personal situation. You need to consider if the scheme will allow you to invest and control it within your own preferences.

3. How do I set up a personal pension?

There are a number of providers out there who you would be able to contact directly and arrange a pension set up, equally, you can take professional advice from one of our personal finance partners who will arrange the pension set up for you.

4. How does a personal pension work?

Generally, you will be able to pay in on a regular basis or via a lump sum, as would your family members. The provider will then arrange for any basic tax relief due to be added to the pension, and you will need to reclaim owed higher rate tax relief via your self-assessment tax return.

5. How much can I save?

As a company director, your company can make employer contributions to your pension fund. There is no limit to how much you can pay in but tax relief is available on contributions up to £60,000 per year (this rose from £40,000 on 6th April 2023).

If you’ve been a member of a pension scheme up to 3 years prior, but haven’t used all your annual allowances in that time, you can benefit from the ‘carry forward’ rule and contribute any shortfall in previous years’ allowances. For example, if you didn’t contribute at all for the last 3 years you can now pay in a lump sum of up to £100,000 and still receive tax relief.

6. How do I start using my pension?

Once the pension is opened you can generally set up Direct debits, standing orders or make faster payments into the pension scheme.

7. What are the tax implications of a pension?

Pensions can provide a significant amount of tax relief dependent on your situation, and they can provide great legacy planning as part of wider estate planning, but there are tax implications when you come to draw a pension as only the first 25% is tax-free with the remainder taxed at your marginal rate of income tax when you draw the funds.

8. How do I choose a pension scheme that’s right for me – what are the things I should consider?

How much do you want / can pay in? Are there any minimum amounts that can be paid in? Does the scheme offer the flexibility you want in terms of where you can invest? What are the costs of the plan?

9. What are the common pitfalls that people fall into when considering a personal pension?

Future planning tends to be key, as not all pensions that are appropriate for you now, are the same when you are older. You need to make sure that the scheme you are funding allows you the investment options for both now and the future, and that you have a clear plan in place in terms of your income in retirement goal, and how much you need to save to achieve this.

10. How do I work out how much I need to put into my pension?

There are a number of rules of thumb around how much based on your age, your targeted income etc, but I always find that using cashflow models for your bespoke situation is the best way to work out what’s best for you.

11. How do I know if my pension will meet my retirement needs?

You will need to consider your future objectives, in terms of investments and access, and then check this against the scheme rules of the pension you are thinking of applying for.

12. Can I arrange a pension myself or should I take advice?

This all depends on your investment experience and confidence, but like most professions having a pro give you some advice is never a bad idea.

13. How do I know if I can afford to invest in a pension?

Complete a budget planning exercise and any disposable income can then be considered for what is a longer-term investment. It may not be exciting, but doing this and paying into a pension is something we all have to do to support our future goals.

14. What if I start paying in and then my work changes and I can no longer afford to do so?

This isn’t a problem, as any money already in the pension will remain invested in the markets giving the funds a chance to grow, even if you are actively contributing.

15. Am I able to take any of my pension pot before the age of 55?

Simply no, this is the current minimum access age for a pension, which is increasing to age 57 in the near future, and beware any scheme that says it can do it for you!

For further information, please contact your Workwell accountant.

*The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.


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