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As a contractor you can benefit from significant tax breaks on pension investment whilst providing a nest egg for your retirement.

Umbrella clients

You can invest virtually all of your contract income and avoid both income tax and any national insurance deductions by taking advantage of what's known as a salary sacrifice or salary exchange arrangement.

This arrangement is particularly popular with those contractors who operate via an umbrella company because the 'employer' should be able to invest your contract income directly into their pension scheme before it becomes taxable pay.

This means that you invest far more tax efficiently than if you made a personal investment from your own bank account because you won't have been liable for the employers' and employees' National Insurance that you would have to pay on a salary that would then be used to make an individual investment.

This extra tax break can represent a significant boost to your retirement nest egg and so build a valuable lasting legacy of your time as a contractor.

Flexibility is the key

As a contractor you need a pension that can be as flexible as your working patterns are, with the ability to adapt payment schedules and contributions to match your contracts and level of income on a monthly basis.

It is important to check that any scheme that your umbrella provides offers all of this flexibility but if in doubt, a contractor specialist IFA should be able to review the scheme for you and ensure it meets your individual needs.

Using a One Man Limited Company?

If you are not currently operating via an umbrella but would still like to exploit the tax savings available with pension investment then there are a number of ways you can benefit. Contractors with their own limited company can significantly reduce a corporation tax bill by investing directly into a pension via the business bank account.

This can be a very efficient means for transferring company funds into personal hands without a hefty tax bill. Contractors that are nearing or over age 55 can even look forward to releasing 25% of their pension pot as a tax free lump sum and so you could potentially invest current or retained profits tax efficiently today and tomorrow draw out 25% without paying any tax.

Alternatively, you can invest in a pension personally but will be restricted to an investment of a maximum 100% of salary. For tax purposes you may have decided to keep the salary low and so this can be a significant limiting factor and this is why many contractors will favour a company contribution instead.

Decisions, decisions

With most good pensions you have complete flexibility to how your funds are invested so you can tailor your investment to suit your individual needs. A contractor specialist IFA can advise you on the investment path that would most suit your retirement goals and your current attitude to risk, helping you make an informed decision on your future nest egg.

Make pension investment a priority for 2012

The importance of having an income in retirement has really climbed up the agenda in recent years and is now one of the key concerns for the Government and public alike. The state pension is going to be under immense pressure in years to come and the Autumn Statement announced plans to move the retirement date to 67 from 2026 as the realities of an ageing population and shrinking workforce begin to bite.

It has therefore never been more important that we make private provision rather than rely on the state to provide and with the NEST scheme due to roll out in late 2012 and new flexibility on the £50k annual allowance, there has never been a better time to start investing for tomorrow so you can save tax today.

Further Information

This article was written by Tony Harris is MD of ContractorFinancials, our long-term partner IFA.

Visit our contractor pensions page to find out more about the options available to you.