Best pension plans for contractors

The flexibility of being your own boss comes with a lot of benefits, but there are also some downsides to consider as well. One of which is, you do not receive a company pension.

As specialist contractor accountants, we strongly advise all our clients to start paying into a pension scheme as soon as they can. As the later you leave it, the less money you will have to draw on when you come to retire.

As income from self-employment can be erratic, paying large sums on a regular basis into a pension scheme, may not be a viable option for everyone. When looking at pension schemes and pension providers it is important to look for one that is flexible.

Whatever you plan to do on your retirement, whether it be sitting on a beach in sunny Spain, or hiking up Snowdonia, here is what you need to know about contractor pensions.

Types of pensions available to contractors

Contractors only have access to private pension schemes. A private pension is where you make payments during your working life and make withdrawals from the scheme when you retire.

There are two types of private pension schemes; Stakeholder and Self-invested Personal Pension (SIPP).

Stakeholder pension

A Stakeholder Pension is one of the most popular types of pensions for contractors as they offer flexibility around the amount of money that can be paid in.

The money that you contribute to a stakeholder pension is usually invested in a range of stocks and shares, which is designed to grow your investment. Upon retirement (or once you reach 55) you can access the money.

Self-invested Personal Pension (SIPP)

SIPP’s offer greater flexibility in the management of funds. You can decide to change funds when you see fit in order to achieve better returns on your investment.

This type of pension is better suited to someone who has a good level of understanding of investments. Or, if you prefer you can assign an Investment Manager to manage the funds for you. Obviously, there is a cost associated with this, so you pay higher charges with a SIPP than with a stakeholder pension.

Consolidate your existing pensions

If you come to contracting later on in your career, you may already have pension schemes in place from previous employers. Running several pension schemes can be costly, as you will be paying management fees and charges on each pension scheme. Plus, it is also difficult to keep track of how much you have invested in each scheme.

If you are in this situation, we recommend that you seek professional advice from a financial advisor who deals with contractors. The advisor will be able to review your current position and tell you if you will be better off consolidating your existing schemes into fewer schemes.

Not only will this cut the management fees associated with your pensions, it will be easier for you to manage when you do come to retire.

Before making any changes to your pension, you should seek guidance from a financial advisor who is experienced in the contractor sector. If you are looking to engage with a financial advisor we will be happy to recommend someone, give us a call on 01962 867550.