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Expert guide: What is a contractor pension? 

The self-employed are lagging behind regular employees in pension contributions, and whilst it can be a daunting task to manage your own pensions its important to understand your options, the experts at Dolan Accountancy explain everything you need to know when saving into a pension

Whilst the number of contractors and freelancers saving into a pension has increased – (up 24% since 2018), they still lag considerably behind permanent employees when it comes to pension contributions. According to the Association of Independent Professionals and the Self-Employed (IPSE), 45% of contractors aren’t currently saving into a pension pot. If you are self-employed it is up to you to save for retirement as you won’t be enrolled into a company pension.

Sorting out your own pension provision can be daunting, particularly when you are managing income as a contractor, the experts at Dolan Accountancy explain everything you need to know about saving into a pension.

What is a contractor pension?
A contractor pension is an investment designed to provide an income after retirement. Typically, the earlier you plan for retirement, the more prepared you will be, but there is always time to start. Research has shown that 40% of contractors waited until they reached age 31 or over before contributing to their pension.

Since 2018, a new legislation called auto-enrolment means all employers must ensure there is a pension scheme in place for all employees, and depending on certain criteria you will automatically be enrolled into a scheme. But as a contractor running your own limited company, you will not automatically have this in place. Limited company contractors running a one-person business with no employees are outside the scope of pension auto-enrolment rules.

What options do you have?
As a contractor, there are two main options you can take: Personal pension contributions or company pension contributions.

Personal pension:
The first option is to open a personal pension such as a stakeholder pension or a Self Invested Personal Pension (SIPP)- which typically gives you a greater investment choice. You can pay into this regularly and can take contribution breaks if you need to.

Personal pension contributions are paid from your net income after all applicable taxes have been deducted. However, these contributions are eligible for personal tax relief, which means that the pension provider will top up your contribution by 20%. If you are a higher-rate taxpayer, you may be entitled to a tax refund when you complete your personal tax return.

Company pension:
Another option is to set up your own workplace pension, which you can do if you operate as a limited company. Company pension contributions are paid from the company’s income, before tax. This means that you save both income tax and corporation tax on any pension contributions. Most limited company contractors will make their pension contributions through their company as this is more tax-efficient. It is almost always more tax-efficient to make contributions directly from your company, although this isn’t always the case – your accountant will keep on top of this for you and advise on the most tax-efficient way to top up your pension fund.

How much should you contribute?
A question often asked is how much a contractor should be contributing to their pension, but there is no specific answer. Every person has a different idea of what a comfortable retirement will be and has a different budget. Getting professional advice is important to ensure you are investing in funds that are appropriate for your financial situation and to meet your retirement goals. The annual pension personal allowance is £60, 000 a year.

Consulting with financial professionals who understand the unique pressures of contracting pensions can make this a much less daunting decision. Find out more here:

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