Setting Up Your Pension As A Contractor Or Freelancer

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September 23, 2016
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Leaping into the unshackled territory of freelancing or contracting has many perks, most of which involve separating yourself from the whims of an employer. While this freedom is certainly something to cherish, it can antagonise the question about what happens when you stop working decades down the road.

Is it possible to set up a pension scheme easily, for yourself?

We all need to know that our old age is secure and provided for. So let Bright Ideas Accountancy lay out the route to a self-employed pension pot, and how to narrow down your options…

Choosing the right scheme

For independent professionals, there are essentially two main pension types that differ slightly from one another. These variations are minor, but can affect your long-term investments in a big way, depending on how you prefer to handle them.

The first is a personal pension plan, which functions on a fixed monthly rate of contributions. It’ll be set up with an independent pension provider, such as a bank or building society, who will claim back tax relief from HMRC to ‘top up’ your finances.

Alternatively, you can opt for a stakeholder pension, which doesn’t require fixed contributions for a specific period. You can put a lot of money in one month, and very little the next, for example, making this a more flexible agreement.

In either case, a financial advisor or pension provider will assess how risk-averse you are as a person, selecting high or low-risk investments depending on your unique profile.

Going limited for life

Once you’ve settled on the exact scheme you want, we strongly recommend setting yourself up as a limited company, taking advantage of what this can mean to your contributions. In essence, incorporation allows you to pay directly from the business’ gross profits instead of your own salary.

This allows you to keep your national insurance at a low level, whilst still enjoying the benefits of pension-associated tax breaks. You’ll take a full wage home every payday, instead of shaving part of it off for the demands of your scheme.

How much should you put in?

This query depends on a couple of things – the estimated trajectory of your working life, your risk profile, and what you can afford to deduct from your earnings. Your annual allowance for tax-free pension contributions is £40,000, but 12-15% of your average monthly profit is common practice for most contractors and freelancers.

If you’re fretting about how much to splash out on a pension scheme, whether as a fixed contribution or not, then Bright Ideas can take a look at your accounts and give quality advice on the matter. We can also help you go limited, securing your finances as best as possible from the taxman’s grasp.

It all starts with a ‘hello’, so call us on 0161 669 4221 or email Info@biacccountancy.com to begin building your retirement plans, however distant they may seem!

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Whether you’re a contractor, freelancer, or small business, Bright Ideas can help remove the burden of time-consuming and complex finances. We’ll draw on our years of knowledge and experience earned helping sole traders just like you.

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