As a contractor working via a limited company, have you considered what provisions you have made for your retirement? Have you made any at all? Pensions represent a very efficient way of reducing your tax exposure whilst investing for your retirement at the same time.
Pension contributions are classed as a deductible expense and regardless of how you structure your salary and dividend income, you can invest up to the £40,000 annual allowance by making an employer contribution. Essentially your pension will act as tax efficient vehicle to house pre-taxed profits for access in later life.
In addition to the tax savings, pensions have never been as attractive as they are now. In April 2015, the government gave people over the age of 55 the freedom to use their defined contribution pensions as they wish. According to former Chancellor George Osborne, the freedoms represented “the most radical change to how people can access their pension in almost a century”.
People who value the security of an annuity can still purchase one, but those who want more control over their own finances can, instead, draw down their pensions as they see fit.
The changes mean greater flexibility in how you can use a pension to receive an income and pass on benefits to your family and others
Under the new system, you are not prevented from accessing your pension savings flexibly if you want to. The options for taking income are:
This option allows you to draw as much or as little from your pension fund as you like. There is no upper limit on income, so you can take the entire fund if you wish. Up to 25% of the amount you move into flexi-access drawdown is tax free, if you have not previously used the fund for drawdown. Income thereafter is taxed at your marginal rate of Income Tax.
It must be noted that taking income above a certain level may not be sustainable or tax-efficient.
Uncrystallised funds pension lump sum (UFPLS):
There is an option that allows you to take a one-off payment or several lump sums directly from the pension fund itself. Each time you take a lump sum though UFPLS, 25% of that withdrawal will be tax free and the rest will be taxed at your marginal rate of Income Tax.
Annuities are not new and they will remain the right choice for many people at some point during their retirement. Traditional annuities pay a guaranteed income for life in exchange for your pension fund. You can normally choose an annuity to pay a level income, or one that rises over time.
The value of a pension with St. James's Place will be directly linked to performance of the funds you select and the value can therefore go down as well as up. You may get back less than the you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Please contact us for more information.