Your company is good pension news at any age
Retirement finances worry many people. But there are solutions. Directors have the right to invest money withdrawn tax-efficiently from limited companies that they own into a range of modern flexible pension options - often with attractive additional benefits. Here's how.
Pension peace of mind
Business owners have many responsibilities, including making their own personal pension and retirement plans. It is important not to miss out on major opportunities.
Even though the state pension system was overhauled radically recently, the income it yields is unlikely to meet your full future financial needs. You probably need extra income resources.
Employees and employers
New auto-enrolment rules mean that employees will soon have to be covered by in-house pension schemes set up by their employer. However, what about employers themselves?
As we explain here, business owners are in a stronger position than they might think. The key is to take advantage of your business. You can start at any age. But the sooner the better.
Pension tax-relief for owner-directors
As a director, you have the right to withdraw money with Corporation Tax relief from your own limited company and invest it in a range of modern pensions.
These can be carefully-tailored to your individual circumstances, choice preferences, or wish to be directly involved in investment decision-making.
If you would like know more about your own specific pension-planning, taxation and opportunities, please ask us in confidence for more information at any point.
However, the benefits don't end there. With careful selection, you can also improve your life, critical health and personal health insurance provision.
Tax-efficient pension roadmap
Below, we look at the taxation advantages open to employers, employees, sole traders and partnerships, and the three basic types of pension available to limited company owners.
Relevant Life Cover is another area important to employees, including directors, and provides tax-efficient life insurance cover. Income protection may be a priority for you too.
We also consider the changing pensions landscape and its implications for savers.
Finally, we give examples of monthly and annual pension contributions you might choose to make at different stages of your business career to realise the retirement income you need.
Tax-saving employer pension contributions
As an employer, you can potentially make tax and National Insurance savings of up to 32.8%. In parallel, as employees, both you and your staff can also make tax savings if this contribution is paid directly into your pensions.
Breaking this down into further detail: -
- Business owners and company directors save tax as both an employer and employee
- Sole traders and partnerships can make similar gains
- Contributions to employees can be offset against the income tax liability
- Employers - unlike salaries, pension contributions are exempt from National Insurance at a rate of up to 13.8%
- Employees - subject to the employer's approval, employees can make more tax-efficient contributions by replacing part of their salary with a pension contribution
- If you are a sole trader you have no a limited company to make tax-efficient pension payments for you. Even so, you can still opt for income protection, accident or illness cover and private health insurance with the proviso that you pay for these yourself.
- Again, if you would like more guidance on how this works in practice, please ask us.
Although the specific choice is wide, there are basically three types of pension open to owners of limited companies.
Stakeholder pensions are a straightforward form of defined contribution personal pension with low, flexible minimum contributions, capped charges and simplified investment choice options
Personal pensions offer greater flexibility over investment choices and can be managed by you directly, or a professional advisor on your behalf
Self-Invested Personal Pension (SIPP) are Government-approved personal pension schemes in which you make your own selection from investments approved by HM Revenue and Customs (HMRC)
Relevant Life Cover
Tax relief can also be gained on premiums used to pay for what is now termed 'relevant life cover'.
This is a life insurance policy in which a company offers a death-in-service benefit to staff, including salaried directors. Set up by the company, it pays out a tax-free, lump sum on the death or terminal illness diagnosis of the person insured.
Tailored to an individuals' budget, this provides a regular income if you are unable to work because of accident or sickness so that you can continue to pay monthly bills when your normal income stops.
New pensions landscape
Modern pensions are essentially flexible investments that remove age barriers and allow savers to enjoy the whole value of their money with the advantage of increased personal tax allowances.
When new pension freedom rules were introduced 6 April 2015, a bad press masked these important opportunities.
Now, from the age of 55, tax payers can access as much of their pension savings as they wish from defined contribution pension schemes (money purchase schemes).
Instead of having to buy an annuity or put money into drawdown, there is no restriction on the amount of saving you can take out of an appropriate pension pot, although only 25% is tax free.
With caveats, not having to wait until the statutory retirement age to enjoy the benefits appeals to many people. There are attractions, but also potential pitfalls.
Once again, professional guidance can make this area of pension reform more tax efficient, particularly where personal allowances can be used to reduce tax liabilities.
Level cost playing field
Another long-standing cause of bad press was also addressed by a Financial Conduct Authority (FCA) review in 2012. All pension advisors and advisor companies now work on a fixed-fee basis, rather than commission.
One result is that customers now have a much greater 'yes or no' say on pension plan proposals, plus better value for money.
Pensions - how much should I contribute?
A question often asked by business owners is what percentage of my income should I put into my pension pot to maintain my lifestyle?
The answer depends on what age you begin and your salary level.
As a rule of thumb, take your age when starting to contribute and halve it. Then put this % of your pre-tax tax salary aside each year until you retire.
Take, as an example, an annual salary of £40,000. If you start saving at the age of 30, your monthly contribution should be 15% which is £500. Starting at 40, your contribution should be 20% or £667 monthly. At 50, you should be putting aside 25%, or £833.
It is important to remember that when you invest in a pension you get tax relief at the rate at which you pay tax.
Therefore, if you are a higher rate tax payer contributing £60, you will increase your pension pot by £40 to £100.
The maximum amount of tax relief you can expect is equal to your earnings. Therefore, if you have earned £40,000 but invested £50,000 into a pension - adding £10,000 from your savings - you will only receive tax relief on £40,000.
Your lifetime limit is £1 million. Beyond this you will get no further tax relief on contributions.
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Making tax less taxing
Tax is a complex subject; tax benefits depend on individual circumstances. Professional advice can be invaluable. It is important to remember that tax rules can change.
This is why our pension team at Pettecrew Financial Planning Ltd works closely with the Chris William's accounting team at Premier Accounts & Consultancy Ltd.
If you would like more detailed information on tax-efficient pension planning, please contact Chris or myself directly for a confidential reply. We cross-refer enquiries to ensure optimum solutions.
Mark Carter, Independent Financial Advisor, Pettecrew Financial Planning