Are you a contractor and confused about how pensions work?

Are you on track to reach your retirement goals?
When it comes to planning your retirement, it is important not to underestimate how much income you will need per year to maintain a comfortable living standard. A recent report by Prudential shows that those who will be retiring within the next 12 months will be expecting a larger income than those who took their pensions in the last 2 years at £15,800, £500 higher than last year. This optimism comes after a five year period in which people’s retirement plans had been crushed by the market crash. With those retiring before the recession in 2008 expecting to command an average income of £18,700, nearly £3000 higher. 

Don’t underestimate the cost of retirement
Although it is good news that retirement incomes are rising, Contractors should consider whether an income of £15,800 a year would be limiting when it comes to enjoying a comfortable retirement. In the Autumn Statement, Chancellor George Osborne speculated that the age at which you can receive the state pension could rise to 69 by the late 2040s. Meaning that Contractors currently in their 20s and early 30s may have to work into their 70s before being eligible for the state pension.

According to a study by BlackRock, British pension investors hope to achieve an annual household income in retirement of £27,400, much higher than the average figures of what pensioner’s will expect this year. In order to achieve this level of income, these investors think they would only need to save £259,000. Unfortunately, the truth of the matter is that with life expectancy on the rise, they would actually need to save closer to £525,000 in order to achieve their goal.

Make the most of the £50,000 annual allowance
In order to avoid financial worries when it comes to retirement, Contractors should ensure they are taking full advantage of the annual allowance that you can invest up to per year and receive tax relief at your highest nominal rate. This tax year the annual allowance has been £50,000 but it will go down to £40,000 from April 2014, this means that Contractors should waste no time in investing up to the allowance before tax year end.

If you have built up a pot of retained profits in your limited company then you could invest them directly in to a pension and avoid a hefty corporation tax bill. Whilst this will mean delaying getting your hands on the cash until you reach age 55, it does represent a very tax efficient method of transferring funds from company to personal hands. At 55 you can choose to release up to 25% of your pension as a tax free lump sum with the remainder left to grow or used to provide an income.

As long as your day to day expenses are covered and you have taken any salary or dividends that you require, you should be able to invest as much of your remaining income and retained profits into a pension as you would like because there is no relationship between salary and the size of a company contribution. As funds are transferred directly, there is no personal income tax or national insurance deduction and you also save on the corporation tax that you would otherwise have paid on this year’s profits. 

Don’t delay, invest today
When it comes to organising your pension don’t leave it too late. Our experienced pension and investment Advisers are on hand to help, whether you are 48 or 28 they will advise you on the best pension to suit your needs and retirement goals. 

To get your pension organised, contact Orange Genie Accountancy and they will put you in touch with the best advisers. 01296 468 483

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