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Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
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What are my pension options?
As a freelance contractor, you will no longer benefit from any occupational or corprate pension schemes. If you want a comfortable retirement, it is up to you to plan for it effectively. That's the bad news!
The good news is that if you have established your business as a Limited Company, as a Director of your own company, you have many more options open to you that you would have if you were a standard employee;
Private pensions - A private pension scheme relies on direct payments to an organisation which invests on your behalf. They can be set up by an employer or private financial company, and broadly speaking, there are two types:
1. Occupational pensions
2. Personal pensions (including stakeholder pensions and group personal pensions)
Personal pensions - A personal pension is a type of private pension that is approved by HM Revenue & Customs and receives certain tax advantages. You take out a personal pension under a contract with a pension provider and contribute to it yourself.
Personal pensions are money-purchase arrangements in which your money and any additional contributions from a third party, such as an employer, is invested to build up your pension fund. Most personal pension providers require you to make payments on a regular basis, or lump sums, for example at the end of your tax year. The value of the final pension you receive in these schemes
depends on the amount invested, the time invested and the quality of the funds you invest in. You, as an individual, bear any risk on the investment returns in these schemes.
Stakeholder pensions - A stakeholder pension scheme is a flexible and portable personal pension arrangement that must meet strict government standards. The main differences between stakeholder pensions and other personal pensions are:
1. Annual management charges capping as set down by law
2. The amount you can contribute to a stakeholder pension each year is not determined by your earnings, so they are suitable for non-earners, including children, too.
The charge capping means that some providers choose to invest in simple tracker funds that do not provide the wide range of investments many unit-linked personal pension funds offer.
Taking pension benefits
There are now many ways that you can draw an income from a pension. Traditionally, individuals took 25% Tax Free Cash (TFC) and the balance as an annuity. However, annuity rates are very poor, and they lack flexibility and often offered poor death benefits. New rules allow more flexible options, including taking part of your pension whilst you slow down to a part time role, but leaving
the balance to grow, or Unsecured Pension (USP) or Alternatively Secured Pension (ASP).
Pension alternatives
There are disadvantages with pensions, such as the lack of flexibility, management charges and the fact that you can take only 25 per cent of all your pension arrangements as a tax-free lump sum. However, for contractors who operate through a limited company, company pension contributions to a pension represent one of the most tax efficient ways of getting money out of the business as it
can save National Insurance (NI) contributions, income tax and corporation tax. Although your pension contributions attract tax relief, the payments you receive when you retire will be taxable, though there will be no NI to pay.
There are many alternatives to a standard pension for a company director – see the paragraphs about SIPPs further on. Or, if you would prefer your retirement income, rather than the contributions you make today, to be tax-free, you could take out an ISA. Of course there are other options as well, such as building up a large property portfolio, where you can benefit from the power of gearing, but being a landlord is a decision not to be taken lightly.
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The good news is that if you have established your business as a Limited Company, as a Director of your own company, you have many more options open to you that you would have if you were a standard employee;
Private pensions - A private pension scheme relies on direct payments to an organisation which invests on your behalf. They can be set up by an employer or private financial company, and broadly speaking, there are two types:
1. Occupational pensions
2. Personal pensions (including stakeholder pensions and group personal pensions)
Personal pensions - A personal pension is a type of private pension that is approved by HM Revenue & Customs and receives certain tax advantages. You take out a personal pension under a contract with a pension provider and contribute to it yourself.
Personal pensions are money-purchase arrangements in which your money and any additional contributions from a third party, such as an employer, is invested to build up your pension fund. Most personal pension providers require you to make payments on a regular basis, or lump sums, for example at the end of your tax year. The value of the final pension you receive in these schemes
depends on the amount invested, the time invested and the quality of the funds you invest in. You, as an individual, bear any risk on the investment returns in these schemes.
Stakeholder pensions - A stakeholder pension scheme is a flexible and portable personal pension arrangement that must meet strict government standards. The main differences between stakeholder pensions and other personal pensions are:
1. Annual management charges capping as set down by law
2. The amount you can contribute to a stakeholder pension each year is not determined by your earnings, so they are suitable for non-earners, including children, too.
The charge capping means that some providers choose to invest in simple tracker funds that do not provide the wide range of investments many unit-linked personal pension funds offer.
Taking pension benefits
There are now many ways that you can draw an income from a pension. Traditionally, individuals took 25% Tax Free Cash (TFC) and the balance as an annuity. However, annuity rates are very poor, and they lack flexibility and often offered poor death benefits. New rules allow more flexible options, including taking part of your pension whilst you slow down to a part time role, but leaving
the balance to grow, or Unsecured Pension (USP) or Alternatively Secured Pension (ASP).
Pension alternatives
There are disadvantages with pensions, such as the lack of flexibility, management charges and the fact that you can take only 25 per cent of all your pension arrangements as a tax-free lump sum. However, for contractors who operate through a limited company, company pension contributions to a pension represent one of the most tax efficient ways of getting money out of the business as it
can save National Insurance (NI) contributions, income tax and corporation tax. Although your pension contributions attract tax relief, the payments you receive when you retire will be taxable, though there will be no NI to pay.
There are many alternatives to a standard pension for a company director – see the paragraphs about SIPPs further on. Or, if you would prefer your retirement income, rather than the contributions you make today, to be tax-free, you could take out an ISA. Of course there are other options as well, such as building up a large property portfolio, where you can benefit from the power of gearing, but being a landlord is a decision not to be taken lightly.
Next Page >>