Many contractors, particularly younger contractors, would ask what is the point in paying into a pension and tying up your hard earned money?
Well, as well as providing for your retirement it is one of the most tax efficient ways of saving money. As a contractor through a limited company you have two options. You can pay into a private pension or you can pay into a company pension.
Tax relief is given to each method in a different way. If you were to make private contributions your basic rate tax band is extended and this means you can withdraw more ‘tax-free’ dividends from your company.
If you make contributions to a company pension this is treated as a tax deductible expense and will lower your company’s profits which in turns lowers your Corporation Tax bill.
Either way you will make significant tax savings as opposed to withdrawing this money from your company in the form of dividends.
While you are working you should look to increase the value of your pension pot as much as possible. When you eventually do retire you can take an optional tax free lump sum after the age of 55 and use the rest of the pot to purchase an annuity which will give you a guaranteed income in retirement.
There are also drawbacks in making contributions. Obviously it ties up your money until you reach retirement age.
Also as your pension is invested into various stocks and shares, given the current economic climate there is no guarantee that your fund will increase as significantly as you would like it to.
Many contractors prefer to put there money into less risky investments such as property or ISAs. We would advise that before starting a pension plan or long-term investment you speak to a financial advisor regulated by the FSA.
Simplyco are expert contractor accountants and give expert advice to the contractors they work with. To enquire about our services, please give us a call on 01900 898 440 or email email@example.com.
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