Contractors are one group likely to do particularly well from the pension and savings reforms introduced by Chancellor George Osborne in his 2014 Budget.
However, there are some caveats. For example, almost unfettered quantitative easing (or printing of astonishing sums of money) has dramatically lowered the value of annuities people had been saving for, this has weakened the argument for people to save for their own retirements. And the top rate of tax reducing personal allowance still remains, imposing a 60% marginal rate on earnings from £100,000 to £120,000.
But despite these negative points, contractors benefit disproportionately from pensions and savings flexibility. Why? Because as your typical contractor approaches 55, they are likely to have both a significant pension pot alongside a range of other investments and assets in a diversified portfolio.
This is partly driven by the significant tax advantages both limited company and umbrella company contractors have enjoyed when saving for a pension. Even with today’s lifetime allowance £1.25m and the £40,000 a year contributions cap, many contractors will have potentially many hundreds of thousands of pounds to play with.
Plus contractors tend to be high earning, so many have ploughed their surplus income into ISAs, buy-to-let properties or other assets.
In comparison, most, although not all, employees approach retirement with two main assets alongside any cash savings and investments: their pension pot and their property.
With the flexibility introduced in the 2014 Budget, a typical contractor’s pension suddenly becomes another pot of cash that can be used to complement other assets and investments.
It does not have to be used to buy an annuity of zero flexibility and questionable value. In fact, the flexibility introduced in the Budget means that even contractors who are a long way from retirement now have a much greater incentive to invest in a pension, because they can turn all that tax-efficiently saved money into another buy-to-let property, say, which itself generates an additional income, or enlarge their share portfolio.
Freeing up this investment pot gives contractors even greater scope for growing their wealth, and contractors tend to be fairly sophisticated and savvy investors. The key thing is that they can choose where to invest the pension money to best complement their existing wealth portfolio.
When you add the enlarged ISA allowance and the flexibility to choose between cash or shares or both, then you can really see how contractors benefit further. That surplus income can be invested into an ISA with a sensible amount each year and grow, tax-free. Contractors can choose different strategies of shares versus cash depending on their appetite for risk and also on the objective of their saving.
Now, if only a brave Chancellor, or one less shackled by the realities of coalition government, were to recognise the potential damage done by the top rate of tax and removed the reducing allowance, then high-earning contractors really would have something to celebrate.