pensions for contractors ... no brainer?

You could have tax relief if you have a pension from the company.

If you compare the net result of pension and ISA investment its approx the same:-

As an illustration lets assume an investment gain of 30% for a basic taxpayer.

PENSION:-
£78 net invested gives an investment of £100
Increase by 30% goes to £130
Now if the income is taxed at basic rate...
£130 becomes effectively £101.40


ISA:-
£78 net invested in an ISA
Increase by 30% goes to £101.40


So for a contractor a pension is a no brainer as you don't get the following with an ISA ...


[1] pension tax relief at 22% going in but pay nothing or just 10% coming out (for income below 10K per year)

[2] reduces your corporation tax liability without affecting the amount of tax/ni contributions

[3] You get 25% tax free lump sum on retirement


I'm not saying contractors shouldn't have ISA's ... but we should have a pension preferably a SIPP?

[hgllgh]

how does the draw-out strategy work?

[centurian]

If caught by IR35, LtdCo contributions into pensions are a humungeous no-brainer as you save an extra 20%-odd on the NI portions.

For inside IR35, it isn't quite so cut and dry, but probably still a good thing for the arguments listed above.

The biggest argument for ISA's is that you have total access to your money. With a pension, you have to kiss goodbye to anywhere between 30%-75% of the capital (depending on your draw-out strategy), although you do get the income on that capital.

[Fred Bloggs]

Yes. Personally I think hefty pension contributions is a no brainer for all contractors (and especially now I am a 50% tax paying permie ).

I am one of the few non pension-illiterate in the world who understand how to self invest in shares and the requirement no longer to buy an annuity.

The new post April 2011 rules make a SIPP essential for a contractor, IMO. Expecially for the older ones amongst us like myself.

[moorfield]

Yes. Personally I think hefty pension contributions is a no brainer for all contractors (and especially now I am a 50% tax paying permie ).

I am one of the few non pension-illiterate in the world who understand how to self invest in shares and the requirement no longer to buy an annuity.

[slogger]

Again isn't that the problem the country is facing at the moment and is only going to get worse. People squandering cash and not saving. I am sure we all promise we will but the results don't back that up.

I would personally spread the risk. Do both with a percentage towards your fave one but you still have the back up. If you put it all in your house and there is a crash just as you retire you could fall back on the pension you have been putting some in.

Put it all in one and you don't have the flexibility these times need.

indeed - meant I'd be happy with less not zero, hopefully about 30 % of current income whIch is quite ok, I have a few largish company pensions from way back, and property , also I do save 25% of income, just no longer in pensions - usually overpay mortgage .
But agree - part of mess is people throwing all there cash away.

[northernladuk]

also being young(ish!) and having a family I'd rather have more cash now and less at retirement

Again isn't that the problem the country is facing at the moment and is only going to get worse. People squandering cash and not saving. I am sure we all promise we will but the results don't back that up.

I would personally spread the risk. Do both with a percentage towards your fave one but you still have the back up. If you put it all in your house and there is a crash just as you retire you could fall back on the pension you have been putting some in.

Put it all in one and you don't have the flexibility these times need.

[Fred Bloggs]

I'm a big fan of Ltd Co funded SIPPs, they especially make sense once you're over 55. I put as much as I can into mine. The money is 100% IR35 proof as a bonus too.

[slogger]

Isn't that the whole point of a pension??

lots of pros and cons -- personally I prefer the money in an isa even though not as tax efficient as a pension - mainly:-

(i) can get at cash whenever needed (can see this as being a drawback in some cases!), however you're in control more.
(ii) not as subject to legislation going forward - could see govt changing date at which you can take a pension ad infinitum
(iii) can give isa/other investments to other people - i.e. doesnt die with me and wife - kids get 100% (less ih tax) - think this is a biggie as known a few people whos parents died quite closely - pension dissapeared

also being young(ish!) and having a family I'd rather have more cash now and less at retirement

[northernladuk]

Agree with logic re the numbers, only problem is that as a 31 year old, I won't see that pension money for a long time (or at all!!).

Isn't that the whole point of a pension??

[hgllgh]

Well, the gist of the post was that the tax you pay on the pension income (anuity or income drawdown) is the same as the tax that pay out of your salary before investing in ISAs. There again if you are low salary / high dividend then I suppose that's a reason to go for ISAs. Although at 10K per year max for an ISA its limited.

Also, with the pension contibution limit currently at 50K per year you can still, as a contractor, wait till quite late in your career bfore making the large contrbutions into the pension... BUT the government have reduced the limit from 250K per year to 50K per year in the space of a few years so could be wise to make the contributions now while you can!

[SneakySimon]

Pension vs ISA

Agree with logic re the numbers, only problem is that as a 31 year old, I won't see that pension money for a long time (or at all!!).

Also, your not taking into account the annuity and the tax on the income from that pension.

[hgllgh]

If you compare the net result of pension and ISA investment its approx the same:-

As an illustration lets assume an investment gain of 30% for a basic taxpayer.

PENSION:-
£78 net invested gives an investment of £100
Increase by 30% goes to £130
Now if the income is taxed at basic rate...
£130 becomes effectively £101.40


ISA:-
£78 net invested in an ISA
Increase by 30% goes to £101.40


So for a contractor a pension is a no brainer as you don't get the following with an ISA ...


[1] pension tax relief at 22% going in but pay nothing or just 10% coming out (for income below 10K per year)

[2] reduces your corporation tax liability without affecting the amount of tax/ni contributions

[3] You get 25% tax free lump sum on retirement


I'm not saying contractors shouldn't have ISA's ... but we should have a pension preferably a SIPP?