Cut Tax Today Whilst Saving for Tomorrow
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Why are Pensions Advantageous to Contractors and Freelancers?
Pensions are a great way for contractor and freelancers to invest due to the significant tax breaks available. Pension investments can be invested from gross income (before tax) and thus attract tax relief at the investors highest marginal rate of tax.If you’ve not already set up a pension or don’t currently maximise the allowances available to invest in a pension you could be paying substantial amounts of tax unnecessarily.
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You can invest money direct from your company bank account, saving not only the income tax that would ordinarily be payable, but also avoid the employers and employees national insurance contributions. The tax relief available depends on the level of income and can be up to approximately 49% e.g. with 49% tax relief it means for each £100 contributed, the tax man invests £49 whilst you invest £51. The funds invested then grow in an efficient tax-free pension fund.
Stakeholder and Personal pensions are money purchase pensions (the pension you get is not linked to your salary). These build up a pension fund using your contributions, which in most cases, should be funded from your limited company.
The new stakeholder pensions are in effect almost identical to personal pensions. Although stakeholder pension providers have a 1% cap on charges, in fact most personal pensions have also fallen into line with this low charge regime. The benefits of personal pensions are that they usually offer a wider range of investment choices.
How do Pensions Work?
It helps to think of money purchase pensions as having two stages:
Stage 1: The fund is invested, usually in stocks and shares and other investments, with the aim of growing it over the years before you retire. You can usually choose from a range of funds to invest in. Remember though that the value of investments may go up or down.
Stage 2: When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity. A lifetime annuity is an income you buy with your pension fund when you retire.
The amount of pension you’ll get at retirement will depend on:
- How much you contribute into the fund
- How well your invested contributions perform
- How much you take out as a tax-free lump sum
- “Annuity rates” at the time you retire and the type of annuity you choose
The benefits of money purchase schemes are that:
- You get tax relief on your contributions
- Your fund grows generally free of income tax and capital gains tax
- You are able to choose the funds to invest in
Self-invested Personal Pensions (SIPPs)
SIPPS are a type of personal pension designed for people who want to manage their own fund.
Most SIPPs allow investment in a very wide range of funds and investments such as commercial property, offices, shops, or factory premises.
They often have higher charges than stakeholder and personal pensions. For this reason, they may only be suitable for people who have large funds and are experienced with investing.
If you would like to discuss your pension options further, please complete the online Pension form and we will be in touch shortly.
The value of investments may rise as well as fall and past performance is not a guide to future returns.