A Contractor’s Business Guide to Retiring

Many of us dream of a relaxing retirement one day, but when you’re self-employed as a contractor it might not always be straightforward to plan when you’re already dealing with an irregular income and the challenges of running your own business.

In this guide, we’ll cover the ins and outs of retirement planning for contractors, tips for getting started with retirement planning (whether you’re a veteran contractor or a newbie looking to the future), and introduce the concept of run-off cover and retroactive cover.

Planning your retirement from contracting

You may have been a contractor a long time and be drawing close to retirement age or you might be new to the world of contracting and thinking about where it leads in the long-term for you. Either way, you’ve probably thought about savings and pensions, but you may not have considered how insurance fits into your retirement plan.

Why should contractors have a retirement and insurance plan?

Simply put, a retirement and insurance plan gives you reassurance of being protected financially while enjoying retirement. This means policies known as run-off insurance and retroactive insurance which will continue to cover you after retirement, against claims made regarding work carried out while you were still an active contractor.

If you made any mistakes on a project while you were contracting, they may not be discovered until months, running into your retirement. If this happens and a claim is made against you, you want to ensure you are still protected so that you are not forced to use your pension pot to cover legal expenses or compensation payments.

In short, it offers peace of mind – which is exactly what you need to make your well-earned retirement relaxing.

What insurance policies are available for retired contractors?

There are specific insurance policies available to retired contractors. These include:

• Run-off cover
• Retroactive cover
• Life insurance

We will now go into a bit more detail on each of these to give you a clear idea of which is most suitable for you.

What is run-off cover?

Run-off cover is a policy that protects contractors for a specific period of time in the past, so should a claim be made against you for work carried out during that period, you will be covered. Kingsbridge sell run-off cover policies for 1, 3 or 6 years of protection.

This allows you to maintain your notification period even when your policy ends and you retire, thus protecting you even after your contracting career has ended. As well as for retirement, run-off cover can also be taken out if you close your contracting business for any other reason, for instance, returning to employment.

What is retroactive cover?

Retroactive cover is different to run-off cover in that it covers claims made against work carried out before your policy started. The professional indemnity period covered is usually six years (in line with the statute of limitations).

It’s particularly useful for people changing contractor insurance providers as it covers them for the period before their new policy begun. So if, for example, you were switching to Kingsbridge from another provider to cover yourself during your retirement, you would be covered for work carried out in the past six years before your new policy started.

Why should I take out insurance after I retire?

Taking out insurance after you retire can have a number of benefits, mostly related to protecting yourself financially.

It’s important to remember that when you retire, your monthly income becomes a fixed amount made up of your State Pension and any private pensions you may have. If you have had private pensions (or even past employer pensions) you will probably also have a lump sum to draw from, but it is likely you’ll want to save this as much as possible for a rainy day. In order to protect your pension pot, it’s advisable to remain insured in order to cover yourself legally against claims of past negligence or mistakes. As well as giving you protection, it also buys you peace of mind.

Another form of insurance you may wish to consider is life insurance. This protects your family in the event of your death to cover the cost of your funeral, paying the mortgage and other expenses. If, for instance, you are still likely to be paying off your mortgage when you retire, it’s a good idea to have life insurance in place to help cover the cost of it should the worst happen.

Saving tax on your life insurance

You can look at taking out a life policy via your limited company as a tax efficient way of insuring yourself. If the policy is ‘written in trust’ it’s also tax efficient upon pay-out as your loved ones will not pay tax on any lump sum paid out.

Does IR35 affect contractor pension arrangements?

Contractors who find themselves inside IR35 will want to give some serious thought to their pension arrangements. This is because channelling a percentage of your gross fees direct to your pension fund will offset the amount of tax you have to pay.

The self-employed can claim tax relief on pension contributions of up to £40,000 per year with a lifetime allowance of £1 million and, of course, this applies if you are outside IR35 as well.

How can Kingsbridge help?

Kingsbridge can help you prepare for your retirement with our comprehensive package of contractor insurance. This includes public liability cover, professional indemnity insurance, employers’ liability, directors’ and officers’ liability, and occupational personal accident cover. To discuss this along with our options for retroactive and run-off cover, contact us today on 01242 808740 or email us at [email protected].