There are disadvantages with pensions, such as the lack of flexibility, management charges and the fact that you can take only 25% of all your pension arrangements as a tax-free lump sum.

There are many alternatives to a standard pension for a company director (see WRAPs and SIPPs below). Or, if you would prefer your retirement income, rather than the contributions you make today, to be tax-free, you could take out an ISA, although overall this is less tax efficient. Of course there are other options as well, such as building up a large property portfolio, where you can benefit from the power of gearing, but being a landlord is a decision not to be taken lightly.

As a freelancer, your lifestyle will be quite variable. You may end up working abroad and could even retire overseas. You can use your company’s surplus funds to save for your retirement. To do this, simply leave the money in the company by using a corporate savings account. However, growth rates are unlikely to keep pace with inflation, and this is far less tax efficient than company pension contributions (see the IPSE Guide to Pensions for an explanation on how your company can make pension contributions on your behalf and claim them as an allowable business expense).

WRAPs and Self-Invested Personal Pension Plans (SIPPs)

WRAP is an investment concept that originated in Australia. The idea is that the client has investment freedom and can hold other assets on the platform, such as Individual Savings Accounts (ISAs), Unit Trusts, Bonds, etc. Typically, fund performance can be monitored on-line. Holding all assets on one platform greatly reduces the effect of charges and allows movement between the different asset classes, without the need to disinvest. Typically, a contractor would work with a Financial Planner when using a WRAP.

A SIPP is a personal pension with a wide choice of investments. It lets you choose from a wide range of funds and other investments. You can hold individual stocks and shares in a SIPP should you wish. The SIPP wrapper provides the tax advantages and legal framework for your collection of investments for retirement. What you hold within the SIPP wrapper is up to you. You are able to choose and switch between a wide selection of funds and permitted investment types. With a stakeholder and many personal pensions you can choose only from a limited selection of investment funds.

SIPPs and WRAP allow an enormous range of investment options to be exploited for those with the desire, time and confidence to manage their assets individually. Alternatively a professional adviser can help with some ground rules, asset allocation strategies and guidance.

Pensions