The Contractor/Freelancer pension opportunity
Understanding the changes and how can you make the most of this opportunity
For many years I worked on the front line of the UK pensions industry. So many clients saw the long term benefits of effective retirement planning, but rightly didn't want to over commit due to inflexibilities at the other end of the investment cycle.
Recent changes have totally changed the way in which pensions can be utilised, and they provide flexibility like never before. There is a massive opportunity for Contractor/Freelancers, especially those near or in that 45+ phase of working life, to really make pensions work for them.
I am no longer a pensions/investment advisor, nor does my business give financial advice... I just want people to realise the benefits of these changes and make the most of the opportunity.
Unlock that opportunity
All workers in the UK are soon to be handed extensive new freedoms in how they access and use their pensions upon retirement, thanks to the upcoming Taxation of Pensions Bill. And while the far reaching reforms haven't exactly made national headline news, the fact is that the new rules could have a positive impact on the retirement plans of contractors and freelance workers up and down the country.
So what exactly is in the pipeline for pensions and how could it affect you? We look at the changes below.
A break from the past
At the moment, retirement for most UK workers means taking a one off 25% tax-free lump sum payment from their pension pot, then buying into a rigid annuity with the remaining funds.
The only real alternative available is the 'draw-down' pension - in which the pot continues to be invested as an individual draws from it. However, this option is highly limited for the majority of pensioners, with withdrawals capped at around £9,000 a year from each £100,000 in their fund. It also requires a retiree to waive their right to the 25% tax-free lump sum.
This is all set to change, however. With annuities being heavily criticised for offering poor value, the Government is acting to provide more flexibility in how people invest and use their pension. Offering the potential for both upfront tax savings and additional savings in retirement, it's a radical shake up and opens up a lot of exciting new options for contractors.
Pay as you go
One of the most important reforms to the current rules is known as the 'Uncrystallised Lump Sum' payment. The new rule will let you take your 25% tax-free lump-sum as and when you need it, rather than all at once.
This opens up new options for protecting the tax-free money you don't immediately need in a safe, tax efficient environment. In essence, your pension pot could act a lot like a saving account, but with additional tax incentives! It's no surprise the media is dubbing the new rule 'the bank account pension'.
Many commentators have noted that the rule will create exciting new tax efficiency opportunities in retirement. For example, a retired contractor could spread their 25% tax-free sum over several years and take just enough from their non-tax free savings annually to stay within the personal allowance - minimising the overall tax levied on their retirement income.
The Bill will also drastically increase the flexibility of draw-down pensions, making it a viable option for many more retiring contractors and freelancers. And even if you already have a capped draw-down, the reforms provide the ability to convert to a more flexible option.
Take it all
During this year's Budget, George Osborne announced that pensioners will also be able to take their entire pension as a lump sum, should they want. They will still get 25 per cent of it tax free, and the rest will be taxed at their marginal tax rate.
It will be very important for anyone who does this to plan for their long term income needs, of course. But a one-off entire pension lump-sum could be useful for anyone who needs to pay off an interest-only mortgage, for example, or for those interested in investing in a new revenue stream to help pay for the future.
Pass it forward
Another area in which the new rules could help contractors maximise their legacy is around the taxation of 'death benefits'. It's never a nice thing to talk about, but everyone wants to ensure that they leave their loved ones financially secure when they pass away. And the reforms should provide additional reassurance that the money you leave behind will do just that.
For example, from April 2015 onwards, the 55 per cent charge levied on passed on pension pots will be completely removed if an individual dies before the age of 75. If they die aged 75 or older, the savings they leave behind will be taxed at the dependants' marginal rate if taken as income, or 45 per cent if taken as a lump sum.
Maximise the opportunity
Contractors will soon have more control than ever before in how they access and use their hard earned pension at the end of their career. Taken together with the upfront tax savings available on pension contributions today, now is the ideal time to consider your working arrangements to ensure your income is working as hard as it can for the future.