Most people reach a stage in life when they no longer have the option or the desire to work. Although there are many factors that affect the quality of life from that point, money quite often has the predominant influence. In its simplest form, the larger an individual’s financial resources at retirement, the larger the income that can be generated, and therefore the greater the options that are available.
Tax efficient savings
It should be noted that limited company contributions to a pension scheme are still one of the most tax efficient ways of extracting money from a limited company and in most cases are an allowable business expense to claim against corporation tax. New legislation in April 2011 allows “carry forward” of contributions if you have not made contributions for a number of years and there is now no need to buy an annuity at any age.
Useful to know if you are inside IR35:
IR35 legislation forces you to take 95 per cent of your net turnover as salary, incurring tax and employees and employers NI — a very expensive way of working. However there are expenses that you are allowed to claim before using this 95 percent formula. One of these expenses is employer contributions to a pension plan. Simply put this reduces the amount on which you need to calculate the 95 per cent, thus saving potentially 40 per cent tax, up to 11 per cent employees NI and 12.8 per cent employers NI. Obviously this equates to an extremely large saving, and one that must be considered.
Issues to consider
How long is there between now and when you wish to retire?
The longer there is between when you start building up resources for retirement and when you need to start drawing an income, the more time the investment will have in which to grow.
What investment vehicle do you wish to use?
There are a number of different types of investment that can be used to build up financial assets. All of these have different advantages and disadvantages, including accessibility, risk, tax treatment, cost, etc.
How much is available to invest towards retirement planning?
In most cases, in order to build up sufficient capital, a significant percentage of income has to be set aside to meet this objective. However, there is little point in concentrating on retirement planning at the expense of other priorities. As with most things in life, it is a matter of balance and compromise. As a general rule of thumb, you should be looking to put aside 10-15% of your billable income, to create a decent retirement fund.
What income do you require in retirement?
This is one of the most important aspects of retirement planning, and also one of the hardest to establish. It is usually a considerable time away and involves a lifestyle that it is difficult to envision at an earlier age. There are also a number of variables outside our control that can impact the situation, such as inflation, state support, investment returns, etc. Nevertheless, it is vital that an income objective is set at outset, although this can be revised, both up and down, as time progresses. These calculators can help you assess the variables.
Seek professional advice
Planning for retirement is your own responsibility - seek professional advice about pensions and other options for investing in your retirement. Financial advisors specialising in freelance and contracting issues can be found in the IPSE Supplier Directory
Advice from Freelancing Matters Magazine
- Use our calculator to work out your financial position
- Get more advice from Financial services suppliers within the supplier directory