What is the best pension through an umbrella company?


If you are working through an umbrella company, you should have had the option of joining their own “occupational” pension plan. But is there a better choice?

Here, exclusively for ContractorUK, I will outline your retirement options as an umbrella company entrepreneur, explain some of the basics of modern pension plans, including how they work and why they are so tax-efficient. Additionally, I’ll add some lesser-known umbrella pension considerations, which could make a significant difference to your financial security now and in the future, writes former entrepreneur Paul Mayhew, associate partner of the practice of St. James’s Place Wealth Management.

What pensions are offered to employees of umbrella companies?

Let’s start with the professional umbrella scheme.

Since the parent company is your employer, the parent company is required under government auto-enrollment regulations to provide eligible employees with access to an employer-sponsored pension plan. This legislation was put in place to encourage retirement savings, and it requires contributions from both employer and employee. The idea here is that it encourages both parties to share the cost of funding an employee’s retirement.

For employees of umbrella companies, however, it is not that simple. In practice, all deductions must be deducted from the amounts invoiced to the end customer. Conceptually, this is therefore similar to national insurance – and to the feeling that you are effectively paying both the employer and the NI employee.

Be aware that you can choose to opt out of the program offered to you by your umbrella, if you wish. And you can choose to do so, perhaps in favor of a personal pension instead. Or even if you just don’t want to contribute to retirement! Not something we would recommend of course.

It should also be remembered that if you have a sufficient national insurance record, you are eligible for state pension as well as your other pension schemes. The state pension is a valuable benefit, and it is definitely worth taking full advantage of it whenever possible.

Why save in a pension?

It’s a good question. Pensions can sometimes be seen as complicated and opaque – even quite tedious!

But pensions have changed dramatically over the past few decades. Traditional “defined benefit” plans (which provided income for life) have now been mostly replaced by “defined contribution” plans (based on an investment pot). The latter plans are more flexible, but also come with certain risks, including investment risk and the possibility of running out of funds too early. Pensions also generally have a minimum entry age – currently 55, but soon to rise to 57.

That said, there are significant tax advantages to funding a pension plan. Specifically:

  • You can claim tax relief on the money you invest in it, subject to limitations.
  • The growth of investments on your pension funds will be largely tax-free.
  • In retirement, up to 25% of pension funds can be withdrawn tax-free.

This tax relief on pension contributions applies to income tax. But if the right arrangements are made, it is also possible to avoid certain national insurances – both employer and NI employee. These provisions are called “wage sacrifice”. This is an approach that can theoretically be applied to both the professional umbrella scheme and your own personal pension.

So which should I choose, the umbrella plan or a personal pension?

The answer to this central question depends on a series of factors and circumstances. Unfortunately, there is no single correct answer applicable to all entrepreneurs.

A good place to start is to ask a second question – Can my parent company facilitate Salary Sacrifice both in its own plan and in my personal retirement?

If they can only do it for one of them, then this option has a significant advantage for you, and that is probably enough to base the decision on. Or, if you are currently choosing an umbrella company, this is a great question to ask during the selection process.

If not, I recommend determining if the Professional Umbrella Diet is right for you. Questions to ask yourself include:

  • Does the plan have a range of investments for my pension that are right for me?
  • Do I know how to choose, monitor and adjust these investments? (Or do you have the time and the inclination to do it ?!)
  • Am I confident that my contributions are the right amounts – now, but also to accommodate my future retirement plans?
  • Am I satisfied with the level of service offered by the system supplier?

If the answer to all of these questions is “yes” then the umbrella program may be right for you. If not, it is worth considering a personal pension as an alternative.

Become personal and you will have access to a wider range of investment choices. You can also choose to consult a financial advisor to accompany you, during the constitution of your personal pension and its management thereafter.

Why choose to consult an advisor?

Again, this is a fair question. Financial advice is not free. But good advice aims to be more than profitable. Research undertaken by the International Longevity Center UK has show that those who take advice are on average £ 47,706 better in retirement than those who don’t. This is a sum that even well-heeled entrepreneurs would not smell!

Here are some important factors that an advisor will help you with:

  1. Choosing the right investments for your pension funds, generally taking into account:
    • Your attitude towards investment risk
    • The time horizon of your investments
    • The advantages of broad diversification of investments
    • Ethical investment considerations, if they are important to you.
  1. Discuss investment performance and the huge difference it can make for your retirement plans. Investment returns can never be guaranteed and investment decisions must be taken with care. But in principle, it’s easy to illustrate the importance of investment returns on your pension savings. Consider for example that you have contributed £ 500 per month into your pension for 30 years – £ 180,000 in total:
  • Assuming constant annual growth of 2%, these funds would be worth £ 246,000 after those 30 years.
  • If that growth were 5% instead of 2%, they would be worth £ 416,000.
  • At 8% growth they would be worth £ 745,000 – three times the result of 2%.

These figures are only examples and are not guaranteed. These are not minimum and maximum amounts. What you get in return depends on the growth of your investment and the tax treatment of the investment. You might get more or less than that in practice.

  1. Help you maximize your tax relief by assessing your situation and broader needs, using pensions (and other suitable solutions approved by HMRC, such as venture capital trusts).
  2. Explain the different types of personal pensions, stakeholder plans; Self-Invested Personal Pensions (SIPP), and possibly some older plans that you have had from a previous working life.
  3. Explain some pension limitations – eg minimum retirement age, maximum annual contribution allowance and lifetime retirement allowance.
  4. Also tell you about the risks associated with pensions – including investment risk, the risk of depleting your pension funds too quickly, and potential future changes in legislation.
  5. Review all of the above regularly, to ensure that you remain tax-efficient now, compliant now and into the future, and on track for your future retirement goals.

If you want to get started in your retirement savings as an umbrella contractor, or if you just want to know more, we recommend that you consult a wealth advisor who, like us, offers you a consultation without obligation. Good luck entrepreneurs!

Editor’s Note: Please note that the value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and therefore the value may go down as well as up. You could get back less than what you invested.

Levels and bases of taxation, as well as tax breaks, may change at any time. The value of any tax relief depends on individual circumstances.

St. James’s Place guarantees the relevance of the advice given by members of the St. James’s Place Partnership when recommending any of the wealth management products and services available from Group companies, more details of which are provided on the site. Group website at www. .sjp.co.uk / products.

Paul Mayhew Wealth Management is an appointed representative and represents only St. James’s Place Wealth Management plc (which is authorized and regulated by the Financial Conduct Authority) for the sole purpose of advising on the Group’s wealth management products and services, more details of which are presented on the Group’s website www.sjp.co.uk/products.


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