Pensions Guide
The pensions guide below is intended to give Freelancers an overview of the options available to them when considering planning for their retirement. It focuses primarily on pensions and takes particular account of previous and possible future changes to the rules governing the pensions framework.
The guide not constitute legal or financial advice and neither IMS nor any contributor to the guide may be held responsible for any consequences of actions taken as a result of reading it. The reader should use their judgment to decide whether or not they feel competent to arrive at decisions on these matters and, if not, seek bespoke professional advice.
IMS Pensions Guide 2012Introduction
Most people reach a stage in their life when they either no longer have the option or no longer have the desire to work to generate income. Although there are many factors that will affect the quality of their ongoing lifestyle from that point, it is usually the extent of their financial resources that has the predominant influence
In most circumstances it is safe to assume that a capital resource of £100,000 will generate an ongoing income of £5,000 per annum (5 per cent). So someone wishing to retire on £25,000 per annum today would require income generating assets (i.e. excluding main residence, cars, house contents, etc) of approximately £500,000.
The generation of such an amount of free capital takes careful planning, and must be considered as a long-term and ongoing project.
There are a number of issues that have a bearing on retirement planning:
• How long is there between now and when you wish to retire?
• What investment vehicle do you wish to use?
• How much is available to invest towards retirement planning?
• What income do you require in retirement?
The full range of pension investment options is considered in our pensions guide PDF available above, but for alternative investment schemes outside the realm of pensions, bespoke professional advice should be sought. Contact IMS for guidance.
Freelancing, IR35 and Pensions
Pension planning can be a useful tax saving tool whether you are inside or outside IR35, however the biggest benefit will be to those inside IR35.
IR35 legislation forces you to take 95 per cent of your net turnover as salary, incurring tax and employees and employers NI — a very expensive way of working. However there are expenses that you are allowed to claim before using this 95 per cent formula. One of these expenses is employer contributions to a pension plan. Simply put this reduces the amount on which you need to calculate the 95 per cent, thus saving potentially 40 per cent tax, up to 12 per cent employees NI and 13.8 per cent employers NI. Obviously this equates to an extremely large saving, and one that must be considered.
For those outside IR35, the savings are less because you have control over how much salary you pay yourself — you will save the tax in much the same way, but the NI savings will be less because your salary level is likely to be that much less. However, it should be noted that limited company contributions to a pension scheme are still one of the most tax efficient ways of extracting money from a limited company and in most cases are an allowable business expense to claim against corporation tax.
Pension guide in association with Wealth Matters.
