Pensions represent one of the few last ‘tax breaks’ available to contractors, even after the changes announced by the Chancellor during the 2015 Budget. As a limited company contractor, you have more choice than ever to choose how to manage your retirement funding, along with the upfront tax benefits you receive.
Invest the maximum
The 2015/16 tax year annual pension allowance is £40,000.
Tip: invest up to this level each year and benefit from tax relief on your contributions at your highest marginal rate.
Contractors with a large sum to invest can take advantage of ‘carry forward’ rules for previous tax years, up to £130,000.
Tip: Invest up during 2016/17 if you can.
Withdraw Funds as a Lump Sum
If you are over 55 years of age and have also contributed to a pension, you can now withdraw funds as a lump sum, subject to income tax.
Uncrystallised Lump Sum Payments
As an alternative to withdrawing a lump sum, you can choose to withdraw adhoc lump sums, with 25% tax free and income tax at your marginal rate due on the remaining 75%.
Annuity + 25% Withdrawal
You can buy an annuity, together with an option to withdraw 25% of your pot tax-free, and still be able to transfer the balance to a personal pension ‘drawdown’ arrangement or encash your pension.
The ‘fixed drawdown’ limit on final salary schemes has been lowered from £20,000 to £12,000 per annum.
There is now an increase from £18,000 to £30,000 in the overall triviality limit, so a contractor can access the entire fund up to £29,999, of which 25% is tax free and the remainder subject to income tax.
If you have a ‘capped drawdown’ arrangement, the maximum income limit has been set at 150% of the government’s ‘GAD’ income limit.
Contractors can now pass pension assets down to beneficiaries without any tax considerations if you are under the age of 75 on death, regardless of whether the benefits have been. Your beneficiaries will be able to draw any death benefits under the flexible rules so there is no longer the requirement for them to withdraw funds as a lump sum payment.