Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

Top 5 Pension Tips for Contractors

If you’re working as a contractor, there’s no one else to set up a pension for you and make pension contributions in your name. That means it’s essential to look into the pensions available for contractors as soon as possible to start building your own retirement savings.

With no employer contributions into your pension pot, contractors need to ensure they’re making the most of the pension payments they’re making during their working life. Below are our top five tips covering the best ways to increase your pension if you’re a contractor.

Don’t miss out – make sure you’re not penalised with a reduced retirement income compared to someone who’s getting employer pension contributions just because you work for yourself.

Contractors should set up a pension as soon as possible

The golden rule for all pension savers is that you should start as soon as possible, but this is even more important important if you’re contracting. Employees get their pension topped up by their employer, but when you’re a contractor you are solely responsible for securing your retirement future.

The sooner you start saving for retirement, the less you’ll have to chip in each month to build a decent pension pot.

It's best to start a pension early if you're a contractor

Some contractors find their income is erratic, so committing to larger monthly pension contributions if they start a pension later in life could be a struggle. That’s why it’s best for contractors to start pensions as soon as possible so monthly contributions can be more affordable.

Not only will your pension pot have more time to grow through contributions the earlier you start saving, but there’s also a longer period for investment growth.

Also, pension pots tend to be invested in higher-yielding – but perhaps slightly riskier – assets when you’re younger. That’s because if there are any losses, your fund has more time to gain them back when you’re younger than if you’re retiring soon.

The closer you get to retirement, the safer your pension investments will be to ensure there are no sudden upsets that could adversely impact your retirement.

Neil Adams offers expert financial and pensions advice for the self-employed

With many contractors being exempt from auto-enrolment if they’re a sole worker, there’s little pressure from the government for contractors to start pensions.

However, the later you leave starting a pension, the more you’ll have to put into your pot each month if you want to achieve a comfortable retirement. You’re also throwing away valuable pension tax relief from HMRC each year.

Neil Adams
Pensions & Investments Expert at Drewberry


Pension Pot Calculator

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Your Pension Contribution Results

Using our expertise we've modelled how much your pension could be worth at retirement given how much you're currently paying in and the age at which you've indicated you'd like to retire. Assuming your current contributions remain fixed between now and your retirement, we've put together three estimations of the size of your pension pot on that date based on low growth (2%), average growth (4%) and high growth (6%) scenarios.

Expected Retirement Age
2% Growth Rate
4% Growth Rate
6% Growth Rate

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How Long Will My Pension Last?

Now you know how much your pension fund may be worth, how long will it actually last in retirement? Answer the questions below and we'll do some clever calculations based on government projections of your life expectancy to work out the monthly income you could draw down from your pension.

Your pension pot at retirement

So far we've projected three pension pot sizes for you at retirement based on your contributions and three different growth rates.

At retirement, you're allowed to withdraw up to 25% of your pension tax-free.

You've chosen to take more than 25% of your pension pot upfront as a cash lump sum. Only the first 25% of your pension pot can be withdrawn this way tax-free. Anything above the initial 25% will be subject to income tax at your highest marginal rate.

Enter the income you would require in today's money. We will inflation proof your income in this calculation so it maintains the same purchasing power at retirement as it has today.


Your Income Drawdown Results

Given the income you'd like to receive, we've used our financial expertise to calculate how long your pension will last. With income drawdown your pension pot remains invested after you retire, so we've projected how long your pension will last based on your fund growing post-retirement by 2%, 4% or 6%.

Required monthly income
2% Growth Rate
4% Growth Rate
6% Growth Rate
*The inflation proofed income you will require when you reach your retirement
You've saved hard into your pension pot your whole life, so it's essential you make the right choices at retirement and don't deplete your fund too soon. If you're considering income drawdown, it's very important you speak to an expert pension adviser. Please do not hesitate to call us on 02084327334.
Neil Adams - Final Salary Pension Expert

These calculators help but sometimes it doesn't beat talking to a human. If you need any support please do not hesitate to pop us a call on 02084327334.

Neil Adams
Head of Pensions Advice at Drewberry


This calculator is for illustrative purposes only. It is designed to provide an estimate of the size of your pension fund at retirement based on your current contributions and assumptions we've made about investment growth but is not a guarantee. Please note that this calculator does not constitute financial or other professional advice.

The growth rates indicated are only rough projections of how your fund could grow. As with any investment, your pension pot could rise as well as fall in line with market performance.

This calculator also provides an estimate of how long your pension could last in income drawdown but is meant only as a helpful projection, not financial advice. Income drawdown is just one option open to you for providing a retirement income and may not be right for everyone. You should consult a regulated financial adviser for individual retirement planning services or contact us for pensions advice on 02084327334 before making any decisions.


Find the best pension provider for contractors

One of the key decisions in setting up a pension is finding the best pension provider for your circumstances. When searching for a pension as a contractor, this can be especially difficult as you need to find a plan that will be flexible enough to accommodate the fact that your employment status and income is changeable.

For instance, you might have gaps in your future employment income and have to increase or decrease your monthly pension contributions depending on your finances at the time. That means that a pension with a minimum monthly payment is unlikely to be suitable for you.

Shop around for the best pension for contractors

When picking your contractor pension, you should shop around. Some of the things you should look at include:

  • Fees and charges
  • Flexibility
  • Access to investments and investment funds
  • How your chosen fund will let you access your pension.

What are the pension options for contractors?

The only pensions available to people currently contracting are private pensions, a type of defined contribution pension scheme. They’re essentially big pots of money that you pay into during your working life, which you then use to provide yourself with a retirement income.

Should contractors get a stakeholder pension or a SIPP?

While a contractor might have a defined benefit pension from a previous employer, they aren’t open to those currently working for themselves.

This leaves two main pension options open to contractors: stakeholder pensions and, for the more experienced investor with a larger pension pot, self-invested personal pensions (SIPPs).


Stakeholder pensions for contractors

Given that they’re more flexible when it comes to the size and regularity of contributions and also tend to have capped charges, stakeholder pensions might be better for contractors than SIPPs. However, this will of course depend on your circumstances.

Stakeholder pensions may also better if you’re new to investing and/or are unsure about the investments you’d like to make, as they offer a ‘default’ fund that’s designed to suit as many people as possible.


Self-invested personal pensions for contractors

A SIPP, on the other hand, offers much more freedom and flexibility when it comes to managing your investments. With a SIPP, you or your investment manager is free to manage the funds as you see fit to achieve the kind of returns you’re looking for.

Are SIPPs best for contractors?

A self-invested personal pension requires far more involvement in investment management than a stakeholder pension. That means it’s likely to be beneficial to speak to a pensions adviser to get financial advice if you’re considering using a SIPP for your retirement savings.

An adviser is well-placed to advise you on the best way to open a SIPP and the best investments to make given your circumstances and retirement goals.


Contracting via your limited company? Get additional pension tax relief…

If you work through your limited company, there are two ways that you can contribute to a pension: out of your own pocket (and therefore out of post-tax income) or through your business.

Of these two ways contractors can pay into a pension, doing so through your limited company is usually much more tax efficient as it offers the opportunity for both personal and corporation tax savings.

Most contractors who operate through their own limited company will draw a tax-efficient low PAYE salary, flying just under the income tax personal allowance, and top their earnings up with a dividend.


£100 of gross profit for contractors with dividend earnings of £5,000+

With corporation tax in 2016/17 at 20%, for each £100 of gross company profit the company pays £20 in tax. (Note that corporation tax falls to 19% in the 2017/18 tax year.)

From the 2016/17 tax year, there’s a new dividend allowance of £5,000. Above this limit, you have to pay dividend tax.

If you're a contractor, there are significant tax advantages to making pension contributions via your limited company

So if you choose to pay the remaining £80 out as a dividend in 2016/17 and you already have dividend income of £5,000, you’ll pay dividend tax on the £80.

How much dividend tax you’ll pay will depend on which tax bracket you’re in. A higher-rate taxpayer will pay 32.5% tax on this £80 figure, or £26.

This leaves you with a take-home dividend of £54 and a total payment to HMRC (corporation tax + dividend tax) of £46 out of the initial £100, or an effective tax rate of 46%.

Peter Banks offers expert advice on pensions if you're contracting through a limited company

If your limited company instead contributes the £100 to a pension rather than paying it out as a dividend, it all goes into the pension fund with no tax payable.

This equates to tax relief of 46%. If you were to make the same contributions out of post-tax income as a higher-rate taxpayer, you’d only receive 40% tax relief.

Peter Banks
Pension & Investments Specialist at Drewberry

Contractors can save up to £40,000 each year into a pension as long as their adjusted income (taxable income from all sources + pension contributions) is less than £150,000. This is known as the pension annual allowance and can be calculated here.


Contracting via an umbrella company? Use pension salary sacrifice…

Contractors who work through an umbrella company may be able to use salary sacrifice to contribute to a pension scheme.

Salary sacrifice might be available to make pension contributions for you through an umbrella company

This means the umbrella company will contribute to a pension scheme on your behalf out of your gross income. Essentially, they take a chunk of your salary and pay it into a pension pot for you instead.

As a result, you not only receive tax relief but also relief from employees’ National Insurance contributions.

Meanwhile, the umbrella company gets relief on employers’ NI contributions and also gets to claim the contribution as a business expense, offsetting it against their corporation tax bill.


Example: £100 of income for a higher-rate taxpayer working as a contractor via an umbrella company

If a contractor who’s a higher-rate taxpayer takes £100 as a salary, they will pay £2 in employee’s National Insurance contributions, leaving them with £98. Higher rate income tax is levied at 40%, which takes off a further £40 and leaves the employee with a take-home (net) pay of £58.

You can use salary sacrifice to receive up to £40,000 per year in pension contributions

However, if the umbrella company pays the £100 into a pension, the entire £100 goes into the pot without being taxed (up to the annual allowance).

Assuming a contractor is earning enough, they could contribute the maximum of £40,000 into a pension each year this way.

If haven’t made any pension contributions in the last three years, then providing you have sufficient earnings you may be able to make use of salary sacrifice alongside pension carry forward to further increase your permitted pension contributions in any given tax year.

Get pensions advice if you're working through an umbrella company from Neil Adams

Under auto-enrolment, it’s becoming mandatory for all companies to automatically enroll their employees into a pension scheme – including umbrella companies.

However, valuable pensions tax relief for contractors working through umbrella companies is available now using salary sacrifice, so it makes little sense to wait until the law applies to you.

Neil Adams
Pensions & Investments Expert at Drewberry


Consolidate contractor pensions from old employers

Many people start contracting later in life, which means they’ve already set up and paid into various workplace pensions over the years. They may have accumulated several pensions from previous jobs.

This can be costly for a number of reasons, not least because you’re probably paying management fees and charges on each individual pot.

Cutting down the number of pension funds you have could save cash

Moreover, it’s hard to keep track of how multiple pots are performing, and you may even have some lost pensions you’d totally forgotten about.

If this applies to you, it may well be worth asking a financial adviser to review your pensions. They can take a look at any arrangements you have an advise whether it would be advantageous to consolidate your existing pensions into one fewer plans.

Using a pension consolidation service can make keeping track of your savings easier and reduce the fees you’re paying. It will also be a much simpler process when you come to retire and want to start drawing on your pension savings.

It’s important that you get financial advice before considering consolidating your pensions, as it won’t always be in your interests to consolidate every pension you have.

This is especially the case if you have a final salary pension, or other types of pension with guarantees attached.

Peter Banks
Pension & Investments Specialist at Drewberry

Get expert pension advice for contractors

Get Expert Pension Advice For Contractors

A professional pensions adviser will be able to guide you through the process of setting up a contractor’s pension. If you would like to discuss your pension options as a contractor, you can contact us directly on 02084327333.

Alternatively, drop us a line at wealth@drewberry.co.uk and let us know when would be convenient to have a conversation.

Need advice on setting up a contractor pension?

As well as a pension, contractors should also save some cash which is easily accessible to cover any short-term dips in income or gaps between contracts.

A cash ISA or instant access savings account is a good option for this. However, for longer-term investments, there are other options available, especially if you’ve already exceeded your annual allowance.

It’s also worth considering Income Protection for contractors, as contractors rarely benefit from employer sick pay.

Neil Adams
Pensions & Investments Expert at Drewberry

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