IT Contractor Mortgages and Pensions

The Government's plan to introduce a £140 per week flat rate state pension for all will be welcomed within the contractor community.

Contractors are often unlikely to build up full benefits from the state second pension and yet also struggle to qualify for means tested top up benefits to the basic state pension and so may only receive £102.15 per week from the current system.

This reform of the state pension comes as part of a raft of initiatives to try to simplify the administration of state benefits and will make retirement planning easier for 'permies' and contractors alike.

The introduction of a flat rate state pension will enable the Government to steer clear of means-tested 'top ups' to basic state pension, which makes administration overly complex.

Despite contractors paying NI contributions for much of their working lives they are often unable to benefit from the top ups to the state pension as they will invariably have savings and modest workplace pensions.

In certain circumstances the current system has even acted as a disincentive to save privately for retirement. As such, a flat rate weekly pension of £140 would represent a significant increase from the £102.15 that contractors may receive under the current system.

State pension still a significant drop for contractors

However, even with this increase in potential income in retirement, £140 per week would still represent a significant drop in earnings for many Contractors.

Freelancers will often have a very fragmented pension history, accumulating small pots with various previous employers before taking the plunge to go contracting.

Faced with the real risk of financial hardship in retirement, savvy contractors can invest personally or via their limited company into a private pension instead of leave their future financial well-being to chance.

Whatever your plans are for retirement, there are compelling reasons why you may consider making personal provisions - as you can benefit from Corporation Tax relief of at least 20%, and up to 70% personal tax relief on pension contributions for higher rate taxpayers.

Subject to minimum ages you can even invest today and immediately withdraw 25% of your pension pot as a tax free lump sum.

With a simplified state pension scheme that will now avoid the need for means testing, contractors will be able to save tax today and invest for tomorrow, without fear of being penalised by the Government when you come to retire.

For more information, and to find out what options are open to you, read our contractor pensions page.

Thanks to Tony Harris, MD of Contractor Financials