Too many are reliant on state pension to fund retirement

Published on 29th October 2009

Over a third of the UK workforce has yet to put any money aside to fund retirement and are instead relying on a state pension that is already stretched to breaking point. Contractors must act now to secure their retirement prospects.

According to research by Barings Asset Management, 37% of workers have not made any provision for their retirement and are planning to use their state pension as their only form of income in retirement. Whilst this may have been a perfectly acceptable assumption to make in previous years, the UK is now facing a huge burden on our state pension due to an ageing population and an economy in recession. The concern is that the state will not be able to provide the funding necessary to put the population through retirement in the future and that may leave millions in poverty during old age.

Aside from the burden on the state, Contractors have another incentive for investing in their own retirement fund and this is due to the large tax savings that can be made on pension investment. Since pensions simplification in 2006, investing in a tax efficient pension has never been easier and it now represents one of the few tax saving opportunities left available to the freelance community.

One Man Limited opportunities

For contractors who operate One Man Ltd companies there is a real incentive to utilise this greater freedom - any money that is diverted into a pension will avoid personal taxes normally levied against salary or dividends. The pension contributions can be offset as a business expense thus avoiding corporation tax.

In a post MSC, IR35 and income sharing world it could be argued that pension investment represents one of the few remaining areas of tax planning actually encouraged by the authorities and is a very effective means for a contractor to cut the tax take he/she suffers.

Umbrella Company opportunities

It's not just Ltd company set-ups, which typically operate outside IR35, who can benefit. Any contractors who use an umbrella company for PAYE may well be able to take advantage of a salary sacrifice arrangement to massively reduce their tax bill.

We can liaise with your Umbrella Company to put in place a salary sacrifice scheme which allows the 'employer' to transfer funds directly from your contract income into a pension scheme. Crucially this transfer occurs before the Employers or Employees National Insurance and Income Taxes have been deducted which, even for a basic rate taxpayer, could save a 39% tax take. Higher rate taxpayers save even more.

Tax saved today = an income in retirement

The importance of having an income in retirement has really climbed up the agenda in recent years and is now one the key concerns for the Government and public alike. The state pension is going to be under immense pressure in years to come as the realities of an ageing population and shrinking workforce begin to bite.

Politicians of all parties support the notion of personal responsibility for provision of income in retirement and this is the reason why, when all other tax breaks come under pressure, the pension planning route has been left open to all but the highest earners.

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