Freelancers aged 55 and over can potentially use a pension drawdown to provide a tax efficient mechanism for accessing their pension fund. For many contractors with pension savings of £50,000 or more, a drawdown may provide better returns than an annuity.
The Financial Services Authority (FSA) recommends that anyone looking to enter into a drawdown arrangement seek professional advice before doing so. We have teamed up with Wealth Matters to help advise you on retirement planning in the most tax efficient way.
A pension drawdown lets you take up to 25% of your total pension savings as a tax free lump sum, leaving the balance of your pension savings to grow.
The flexibility provided by a pension drawdown suits many contractors looking to unlock their tax free cash early to help clear debts, pay off their mortgage or even help their children get a footing on the property ladder. You don’t have to stop contracting in order to take your benefits. But it is important to keep in mind that if you do take a drawdown you are reducing the funds available for when you retire.
Annuities versus Drawdown
Most people on reaching retirement typically buy an annuity to safeguard their income. An annuity plan provides an income for the rest of your life, irrespective of how long you live. But once you purchase an annuity it can’t be altered.
Advantages of a pension drawdown
A pension drawdown offers you a degree of flexibility in terms of the way you work. When you reach 55 you can assume a staged retirement and potentially draw down 25% of your pension fund as a tax-free lump sum to purchase an annuity to provide a fixed income for life. This enables you to carry on investing your Ltd Company profits into your pension pot, allowing it to continue to grow.
One major advantage of opting for a pension drawdown is that if you die then the remainder of the fund is paid to your beneficiaries as a capital sum, unlike annuities.
The advantages of Pension investments for Limited Company contractors
Pensions still remain one of the most tax efficient mechanisms for contractors to transfer company profits out of their Ltd Company. You can make pension contributions directly from your limited company saving you considerable amounts of both corporation tax and personal tax.
No matter how small your salary and dividend drawings are you can potentially make tax free contributions from your Ltd Company of up to £50,000 a year. Furthermore, if you have NOT utilised your preceding three years pension allowance you could potentially contribute up to £200K in any given year.
If you’ve recently started contracting and want to understand what your options are for setting up a contractor pension please contact us on 0208 421 7999 and we will arrange for you to speak to a contractor pension specialist.