Why now may be too late to top-up contractor pensions

The clock is ticking for contractors with pension plans, assuming they want to maximise their nest egg before the taxman intervenes! In fact, for contractors, there are just four full calendar months left to top up pensions until their tax-free allowance is pared back.

However, it is important for contractors to check with their independent financial adviser before they set about maximising their contributions as complicated ‘pension input periods’ apply. If your pension scheme shows an input period due to end in the 2011/12 tax year then you could be unaware that you are already subject to assessment based on the new, lower ceiling for contributions.

Announced last month and due to take effect from April 2011, the cap is £50,000 on tax-free pension allowances, and replaces the much more generous limit of £255,000.

While contributions to pension pots made before the announcement (on October 14th 2010) will be assessed on the £255,000 threshold, inputs made afterwards could be subject to assessment against the new £50,000 cap. Disappointingly, the squeeze on pension savers is not short-term unlike some of the government’s previous revenue-raising measures, as the cut in the annual allowance is not due for review until 2014/15.

Some ContractorUK readers could therefore be prevented from adopting the ‘buy now while stocks last’ approach on contractor pension schemes that run tax year to tax year. Contractors also face a nasty surprise if they fail to ensure their overall pension contribution for the input period is within the £255,000 cut-off. For example, a fortunate contractor who had already invested £240,000 before the Treasury announced the changes on October 14th may not be able to invest £50,000 early on under the new rules because this will fall in the remaining input period, and so would take them over the £255,000 threshold that originally applied.

This move appears very likely to sting contractors who operate through a one-person limited company, where the pension input period typically runs in line with the company year. This means that if a limited company contractor’s financial year runs from June 1st to May 31st, this period is also likely to be the pension input period.

Even those who invest via an umbrella company set-up will have an individual input period within the membership of an overall group pension arrangement, which will similarly be affected.

If this new ceiling applies to you then there is a way that you can maximise your contributions for this tax year and continue to invest up to the original £255,000 limit. This involves changing your input period for your pension but this can only be done once. If you haven’t already altered your input period then an independent financial adviser should be able to help you change the date that your input period ends so that it falls within the April 2010/11 tax year, and is therefore assessed against the current annual allowance rather than the £50,000 limit that applies next year.

Contractors who reach their contribution limits and still want to actively plan for later life will also increasingly need to turn to regular savings accounts, bonds and Individual Savings Accounts, among other saving channels.

Pensions Need-to-Know

- From April 2011, the tax-free allowance on pension contributions will be cut by £205,000 to £50,000, with no review until 2014 at the earliest
- From April 2012, the tax-free allowance for lifetime pension contributions will be cut by £300,000, resulting in a new limit of £1.5m until 2014-15
- From April 2011, the factor used to value final salary scheme increases, changing from 10 to 16
- From 2020, the state pension age will increase to 66 for both men and women

Tony Harris, of ContractorMoney, an independent financial adviser to IT contractors.