As more and more workers join the ‘gig’ economy, concerns about saving for retirement have re-surfaced with the government set to launch a review in 2017 to look at pension provision for all self-employed groups.
For limited company contractors, saving into a pension remains one of the last tax breaks available and if they want to have a better retirement, these benefits should not be overlooked. We look at all the latest developments and what it means for contractors.
Having been introduced in the Pensions Act of 2008, employers have a legal obligation to automatically enrol their full and part time staff into a company pension scheme. Since October 2012, already more than 300,000 employers and 700,000 workers are paying in contributions to bolster employee retirement pots as part of a phased in approach that will see all organisations sign up by 2018.
Despite these changes, which were designed provide a greater income over and above the basic state pension, data continues to suggest that the majority of workers are simply not saving enough. For the self-employed, including contractors, the picture is even starker – recent government figures have revealed that pension saving has fallen from 31% in 2005/06 to 14% in 2014/15.
It is little wonder that this has prompted the government to take urgent action. Even the minimum contribution rate of 8% which will be introduced in 2019 is not deemed to be sufficient for a decent retirement. Quite what form the ‘auto-enrolment’ framework will look like for the self-employed remains to be seen, one possibility being higher Class 4 national insurance contributions that would go into a workplace pension scheme.
Contractors can currently save up to £40,000 per year tax free into their pensions (with a lifetime allowance of £1.25m) The big benefit is that their contributions can be made from their limited company’s income – these are invested before tax and are classified as a business expense, resulting in a 20% corporate tax saving. Or if investing from their salary into a personal pension, contractors will still benefit from the 20%, 40% or 45% tax relief that permanent employees receive for their company stakeholder pension schemes.
Yet despite the obvious tax advantages, contractors are not putting enough away into their pensions. One argument is that cashflow needs to be carefully managed especially when starting a new business. And even though contractors are likely to make larger contributions given their higher earnings potential, the irregularity of assignments can make it difficult to maintain consistent payments. As a contractor, you’ve also got your end of year tax liability to think about so saving for a pension can take a back seat.
But as many a financial adviser will tell you, the longer you leave it, the more you’ll have to put in to generate the same return if you want to avoid working past the state pension age. While complying with auto-enrolment may not be mandatory for now, this could change soon. If you’re a one-man band limited company contractor, you might be getting another letter from the Pensions Regulator in 2017.