Contractors still don't save enough for their retirement, and in this they are just like most of us in the UK. Yet, when contractors learn more about the tax breaks offered by pension contributions, they can get very enthusiastic about saving for retirement.
According to a recent survey by the Edinburgh-based pension fund Scottish Widows, only a quarter of UK individuals are saving enough for their retirement while a third of people with at least one pension don’t know where their main source of income in retirement will come from.
The survey from Scottish Widows reveals that while confidence is beginning to return to the pensions market with savings figures up from their 2006 level, only 49% of those questioned are saving adequately and 24% are not saving at all. Pension savings have still not returned to their 2005 level.
Contractors do not enjoy the periods of unbroken service that lend themselves to pension savings
IFA expert
And amidst all this inattention to pension savings, contractors are among the worst, according to an expert independent financial adviser (IFA).
''Contractors, who move from one contract to another, tend to be somewhat careless about saving for retirement even by UK standards,'' says the IFA expert. ''They do not enjoy the periods of unbroken service that lend themselves to pension savings.''
But contractors are also high earners, and they tend to look into solutions that help save taxes, the IFA expert points out. The advantages to be gained by pension contributions, which are limited only insofar as they remain in scale with the business you are running, are quite considerable. Pension contributions will only be disallowable where there is an identifiable non-business purpose for the employer's decision to make the contribution to a registered scheme.
''So when contractors do realise the tax benefits to be had with pension contributions, they tend to make far larger contributions to pension schemes than the average UK worker. This is especially true since contractors tend to be high earners over relatively short periods, so they take advantage of high-earning contracts to make larger contributions,'' the IFA expert points out.
The IFA expert explains: ''You can invest money personally from your own funds or direct from your company bank account. If caught by IR35, you save not only the income tax that would ordinarily be payable but you also avoid the employers and employees national insurance contributions. The amount of tax relief can be as much as 48% meaning that for each £100 invested you pay £52 and the tax man pays the rest.''
All confusion about pension contributions has been dispelled with the recent clarification from the Treasury
IFA expert
''For those outside of IR35,'' the expert continues, ''you can pay 19% on corporation tax and 32.5% on dividends yet benefit from 22% or 40% tax relief when investing personally into a pension.''
There had been a period of confusion about contractor pensions in the past year when the Revenue issued new rules that most of the industry judged unclear. Last month, however, the Revenue issued new guidance which makes it clear that any contractor, whether one working for an umbrella company or one who owns a limited company, can take full advantage of tax breaks on pension contributions.
''All confusion about contractor pensions and tax has now been dispelled,'' the IFA expert insists.