Financial Planning and Pensions
Breaking free of the corporate mould has numerous advantages; choosing your own projects, determining your own timetable, and infinite flexibility of location. This freedom can, however, translate into uncertainty when it comes to your financial future. No longer just an employee, you no longer have the benefits of a corporate pension scheme. There are, however, numerous other options available to you in planning for your retirement:
State pensions
These currently consist of a Basic State Pension based on your NI record, and a State Second Pension, which is an additional pension paid by the Pension Service. Self-employed people cannot make use of the latter. Private pensions
You make direct payments to an organisation which invests on your behalf. The two sub-categories within these are occupational (employer) pensions and personal pensions. The latter is particularly relevant to contractors.
Personal pensions
A personal pension is a money purchase agreement: this is a form of contract. Your money and any third-party contributions are invested to build up a pension fund. Regular (usually monthly) contributions are made. How much money is available at the end depends on how successful the investment is. Risk on the investment is carried by the individual.
HMRC approves this type of private pension and accords it certain tax advantages. Stakeholder pensions
These are a type of personal pension with certain distinguishing characteristics, including the amount you can contribute not being determined by your earnings, and the imposition of a legal limit on the amount fund managers can charge.
Alternatives to pensions
If you are a company director, there are several alternatives to pensions. These include Self-Invested Personal Pension Plans (SIPPs) and Executive Pension Plans (EPPs).
SIPPs offer a wide choice of options for investment and can also be a ‘wrapper’, holding your stocks and shares. There are two types: the Self-Invested Personal Pension (SIPP), which bases contributions on age-related allowances, and the Small Self Administered Scheme (SSAS), which is widely used by company directors and managers and uses similar terms to those in Executive Pension Plan (EPP).
EPPs are popular among contractors who run a limited company. Funding limits were, before 6 April 2006, more flexible and potentially lucrative compared with other types of scheme. Since that date, however, the playing field has been somewhat levelled out and you should seek professional advice in deciding which type of scheme will best benefit you.
Don’t forget – retiring doesn’t have to make you financially inactive. It may well be in your interest to leave money in your company, make use of a corporate savings account and invest in the stock market with the proceeds.
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