Planning your retirement as a professional contractor is less straightforward than it is for traditional employees. Unlike permies, you must manage your own retirement plan to make sure you have enough saved once you stop working.
A popular contractor pension option is the Self-Invested Personal Pension (SIPP).
It offers flexibility, tax efficiency, and a wide range of investment choices, making it attractive for those who want to manage their own retirement pot.
This guide explores SIPPs in detail – how they work and why they’re particularly or interest to contractors. We look at the investments you can include in your SIPP, how tax works and common pitfalls to avoid.
What is a SIPP?
A Self-Invested Personal Pension (SIPP) is a type of private pension that gives you greater control over your investments.
Unlike standard personal, workplace and stakeholder pensions, which typically limit you to a set range of investment funds chosen by the provider, a SIPP allows you to:
- Select from a broader range of investments, including stocks, bonds, funds, ETFs, and even commercial property.
- Manage and adjust your investments easily – this is handy if your contract income is irregular.
- Benefit from tax relief on contributions – as is the case for all types of pension.
- Have maximum control over your pension savings.
We explore these benefits in the next section.
Why are SIPPs a great option for contractors?
Contractors have unique financial circumstances that make SIPPs an ideal pension option.
Here’s why:
1. Wide range of investment types.
A SIPP gives you control over your investments. You can choose from:
- Stocks and shares (individual UK and international shares)
- Bonds and gilts (corporate and government bonds)
- Exchange-Traded Funds (ETFs)
- Investment trusts and mutual funds
- Commercial property (with some restrictions)
This flexibility will allow you to build a diverse portfolio based on your risk aversion and long term plans.
2. Control over your pension fund
With a SIPP, you decide how to access your pension funds when you retire. Once you reach the minimum pension age (currently 55, rising to 57 in 2028), you can:
- Take up to 25% as a tax-free lump sum.
- Keep your pension invested and draw an income through “flexi-access drawdown.”
- Purchase an annuity (a guaranteed income for life).
- Choose a combination of these options.
This flexibility is particularly useful for contractors, as you may want to semi-retire or phase out your contract hours gradually rather than stop working completely at a specific retirement age.
2. Flexible contributions
Unlike traditional workplace pensions, SIPPs allow you to adjust your contributions in line with your earnings.
You can increase your contributions if you have a particularly lucrative contract. If the contracting market is slow, you can reduce or pause your contributions without being penalised.
4. Tax relief on pension contributions
One of the biggest advantages of investing in a pension is the tax relief available on contributions. It remains one of the few remaining tax breaks available to contractors.
- If you contribute personally: Your SIPP contributions receive tax relief at your marginal rate. For example:
- A basic-rate taxpayer (20%) pays £80 into a SIPP, and HMRC tops it up to £100.
- A higher-rate taxpayer (40%) claims an additional 20% tax relief via self-assessment.
- An additional-rate taxpayer (45%) claims back 25% in total.
- If your limited company contributes: Contributions made directly from your limited company are usually treated as a legitimate business expense, which reduces your Corporation Tax bill. Unlike salaries, there’s no National Insurance to pay on pension contributions, making it a very tax-efficient way to extract money from your company’s profits.
How to set up a SIPP
If a SIPP sounds like the right choice for you, here’s how to get started:
1. Choose a SIPP provider
Not all SIPPs are created equal. Some providers offer fully managed SIPPs, while others provide low-cost, self-managed options. When selecting a provider, consider:
- Fees and charges (flat fees vs. percentage-based). Some charge a fixed monthly fee, with no transaction charges. Others charge a very low monthly fee, but recoup their costs by charging transaction fees.
- What range of investment options are available
- Is the platform accessible, clear and easy to use?
- What customer support and help are like?
- Have you had any recommendations from people you trust?
Interactive Investor (ii) is a popular fixed fee UK SIPP provider. You can find out more here
2. Decide how to contribute to your SIPP
- Personal Contributions: If you contribute from your personal income, you’ll receive tax relief at your marginal rate.
- Company Contributions: Your limited company can pay directly into your SIPP, which reduces your Corporation Tax bill.
3. Choose your investments
You can either self-manage your investments or choose a provider that offers ready-made portfolios based on your risk appetite.
4. Monitor and adjust on a regular basis
Keep track of your investments and adjust based on market conditions and retirement goals. With a SIPP, you can change your investments and contributions easily, without paying penalties.
What types of pension are open to contractors?
Aside from the SIPP, three other types of pension are available to contractors.
You may decide to contribute to more than one type of pension scheme – it’s up to you.
For example, umbrella company contractors often contribute to their provider’s workplace scheme and invest extra funds in a SIPP.
1. Workplace pension
Under auto-enrolment rules, all UK employers must offer eligible employees a workplace pension, contributing a minimum percentage of their salary.
- If you work through an umbrella company, you will likely be enrolled in the umbrella’s workplace pension scheme.
- If you operate through a limited company, you are technically your own employer and do not have to set up a workplace pension for yourself. However, if you have employees, you may need to provide them with access to a workplace scheme.
- Workplace pension contributions receive tax relief and may include employer contributions, making them a cost-effective option for those who qualify.
For many contractors, the downside of a workplace pension is that the investment choices are usually limited compared to other private pension options.
2. Stakeholder pension
Stakeholder pensions can be a good option for contractors who want a simple, low-maintenance pension without high fees.
However, they usually offer fewer investment options than SIPPs, and their flexibility may be limited compared to more advanced pension schemes.
3. Personal pension
A personal pension is a private pension plan in which you choose a provider and make regular or lump sum contributions. Unlike workplace pensions, a personal pension is not tied to an employer, making it suitable for contractors and self-employed individuals.
Financial institutions manage personal pensions, which invest your contributions into a range of funds designed to grow over time. These funds are usually selected based on your risk appetite, ranging from cautious to high-risk investment strategies.
A personal pension is often more flexible than a stakeholder pension, but it typically lacks the full range of investment options found in a SIPP.
Common SIPP mistakes to avoid as a contractor
As you can see, SIPPs are an attractive option if you’re a contractor. However, they require careful management.
- Irregular contributions: Inconsistent contributions can reduce the long-term growth potential of your pension. Even small, regular payments compound over time.
- Lack of diversification: Investing in just one class of asset (e.g., only UK shares) increases risk. Spread your investments across multiple asset types.
- Ignoring fees: Some providers charge high platform, trading, and exit fees. Always check the real cost before choosing a provider based purely on a headline ‘monthly fee’.
- Putting investments off: The earlier you start, the more time your investments have to grow through compound interest. Even if you can only contribute a small amount, starting early is better.
- Not reviewing your portfolio: Market conditions change over time. Experts suggest reviewing your SIPP at least once a year.
The ii Which? Recommended SIPP for contractors
Please use this article as a guide only. You should seek professional advice while evaluating your pension options.