Pensions have generally been focused at the full time employed and there has been little benefit to the contractor or freelancers. Following the 2014 Budget this is set to change. There has been a major shake up of the pension system, which makes pensions more appealing to the self-employed. There are now initial tax savings when contributing and substantial savings when accessing funds during retirement.


The major changes that will affect contractors pension are:


  • Multiple lump sums will be able to be taken direct from a pension. This means that you don’t have to take the full 25% tax-free amount all at once but can spread it over time.


  • The entire pension fund can be accessed as a lump sum. The first 25% will stay tax-free but you can also withdraw the rest subject to income tax. This could be used to help contractors pay off their mortgage, debts or be invested.
  • ‘Flexible drawdown’ will replace the existing ‘capped income drawdown’. This means that you will now have the option to draw any level of income you would like to suit your needs. The previous requirements were that you needed to have a minimum of £12k a year secure pension income. This will now be abolished.
  • The way a pension is inherited and taxed has changed. If a contractor is under 75 when they die then their death benefits will be tax-free and it will be taxed at the dependents rate if they are over 75. A dependent can take any of the death benefits without having to take a lump sum and would be able to continue to receive a full income. There will also be no cap on guarantee periods if an annuity has been taken out.


These changes signify the biggest transformations in pensions policies to benefit the contractor. The opportunities on offer will give the self-employed more control and flexibility than they have ever had.