Every contractor knows that planning for the future is key, an important part of which involves saving into a workplace pension. The great news is that if you choose to contract through an umbrella company, you will automatically be enrolled into a pension scheme, making saving for the future a whole lot easier.
In this guide, Umbrella Search explains precisely how this works so you know where you stand when it comes to your workplace pension.
What is an Umbrella Company?
Before we explain how umbrella company pensions work, let’s first look at what an umbrella company is.
An umbrella company acts as an intermediary between the contractor and the client. The umbrella company employs the contractor, and in turn deals with paying the contractor a salary through their payroll, invoicing, taxes, expenses, as well as other administrative tasks.
As an employee of the umbrella company, the contractor becomes entitled to a number of workplace benefits, including a pension.
It's important to note, however, that should you decide to go it alone and contract through your own limited company, you will have to self-enrol into a pension scheme and will be responsible for ensuring you contribute to the scheme each month rather than having this done on your behalf.
What is a Workplace Pension?
A workplace pension is a way to save for the future by setting aside a portion of your pay into a pot you can access for retirement.
Under the Pensions Act 2008, employers are legally required to automatically enroll employees into a workplace pension scheme if they meet the following criteria:
· The employee is between age 22- state pension age
· They earn a minimum of £10,000 per year
· They work in the UK and are classed as a worker. You can find the definition of a worker here.
As we have mentioned, if you contract through a limited company, you do not benefit from auto-enrolment as you are not an employee.
However, contractors that work through an umbrella company are employed by the provider, meaning they benefit from automatic enrolment in a pension scheme if they are eligible.
How much is paid into the Pension?
Contractor Contributions
As part of your workplace pension scheme, a portion of a contractor’s earnings will be automatically deducted and paid into your pension pot.
Currently, the minimum employee contribution is 5% of your qualifying earnings. Qualifying earnings are your gross earnings minus a lower earnings threshold, which is set by the government. However, contractors can choose to contribute more than the minimum if they choose.
Umbrella Company Contributions
As well as the contractor's contributions, the umbrella company is legally required to contribute to your pension pot.
The minimum employer contribution is currently 3% of your qualifying earnings. This means that a minimum of 8% of your earnings will be paid into your pot each month.
It is worth considering that whatever portion of your income you contribute to your pension pot will not be taxed. For this reason many contractors choose to pay higher portion of their salary into their pension in order to reduce their tax liability, known as salary sacrifice. You can read all about salary sacrifice here.
Opting Out of a Pension Scheme
Although auto-enrollment is compulsory, contractors do have the right to opt out.
Before you make this decision, however, it’s important to consider the long-term implications of doing so.
After all, opting out of the pension schemes means you will not only be missing out on setting your own money aside for the future, you will also be missing out on your employer's contributions because if you decide to opt out the umbrella company is not obliged to make payments to the scheme either.
On top of this, you will also miss out tax relief. After all, by paying into your pension pot you reduce the amount of tax you will owe by reducing your taxable earnings.
You will also miss out on the potential growth of your pension pot over time which can help to improve your financial security in retirement. That’s because the money in your pension pot is invested and can bring financial gains when invested well.
If you do want to opt out, you can rejoin the scheme at a later date, but your umbrella company is only required to re-enroll you every three years.
What happens to my pension if I change umbrella companies?
Once you have signed up with an umbrella company, there should be no need to switch companies. However should there be a reason you wish to change umbrella companies you will need to understand what will happen to your pension scheme and current pension pot. Or, if you have previously been in employment and have pension pots with past employers you will need to understand how to make sure you can keep track of all your pension pots.
The good news is it very easy to merge all your existing pension schemes into one.
This is as easy as contacting your old pension scheme and asking to transfer into your new one. If you’ve had many pensions over time and have lost track of your pots, there are tools out there that help you track down your pots and help you merge them into one.
Next steps: get help from Umbrella Search
Many contractors opt to use an umbrella company for the wide range benefits on offer including having their pay and taxes taken care of for them, receiving statutory benefits, less stress and hassle with no need to run their own business as well as the benefit of receiving a workplace pension with contributions from the umbrella company.
Having read our guide, if you now think that an umbrella company is the best move for you, Umbrella Search is here to help with the next steps.
Our team of professionals will work closely with you to determine your contracting priorities and find an umbrella company that will be the perfect fit for you.
To see how we can help simply get in touch today.
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