I recently had a conversation with a Company Director about pensions and planning for retirement. It went something like this….
Me: “What plans have you made for your retirement?”
Director: “None really, I have a couple of old pensions from when I was employed,
although I’m not really sure what they’ll give me. I’ve steered away from putting money into pensions”
Me: “Oh, really, talk to me about that?”
Director “Well, in the early years of building the business I didn’t really have surplus funds, everything went into the business, and more recently…well, I don’t know, my accountant has mentioned pension contributions but I don’t really trust pensions, I don’t want to lose my hard earned money, and besides I can’t imagine I’ll ever fully retire.”
Sadly, this is an all too common conversation.
What's your endgame?
Most directors I speak to love their businesses and struggle to think of a time when they might stop working. Many people with an entrepreneurial streak can feel uncomfortable about the finality of retirement.
However, retirement looks very different now compared to how it did even 20 years ago.
It is now much more common for individuals to phase their retirement over a number of years and the early years of retirement can often be a time of new adventures and lifelong dream fulfilment.
Perhaps it does involve maintaining a business interest but this should also be a time when you are reaping the rewards of your hard work and success.
It’s important to remember that whilst retirement can signal the end of working life it is certainly not the end of life, merely the start of a new chapter. And the more money you have in your pot, the more exciting this chapter can be.
My role as a financial planner is to encourage people to think about and plan for their future and to utilise their assets in the most tax efficient way, to provide for that future.
Let’s start with some of the reasons why investing into a pension is good for business….
Pension are an extremely tax efficient means of extracting money from your business.
Most business owners extract income in the traditional way, keeping salary low and extracting profits via dividends. Corporation tax is charged on all business income after the deduction of allowable costs. A Limited Company will pay corporation tax of 19% (2019/20) and a Company Director who is a higher rate taxpayer will pay a further 32.5% in dividend tax (2019/20) if profits are withdrawn.
Now for some good news.
Employer pension contributions are treated as an allowable expense for the purpose of corporation tax. This means that extracting profits from your business to save into a pension will reduce the amount your business pays in Corporation Tax.
For example, a company pension contribution of £10,000 will result in a corporation tax saving of £1,900.
Furthermore, all growth within a pension is tax free and you can withdraw up to 25% of the pot tax free at age 55.
It’s important to highlight that monies saved into a pension are not readily accessible to you and so you should only invest funds that you know you will not need access to for the long term.
This is as it should be as a pension is designed to provide for the future when you are no longer receiving an income from your business.
How much am I allowed to put into my pension?
In short, an individual can invest the higher of £40,000 per annum or 100% of UK relevant earnings into a pension per tax year. For company contributions, your contributions must abide by the rules for allowable deductions. The rules state that the pension contributions should be “wholly and exclusively” for the purposes of business. Your accountant should be able to advise you on this matter.
There is also facility to carry forward pension contributions from the previous 3 tax years provided you have held a pension during that time, even if you have not contributed to it.
The rules can seem complex and this is where engaging the services of a financial adviser can pay dividends (excuse the pun!)
There are many self-service pension options in the market, and they do have their place. But a good financial adviser, as well as advising on the best pension provider and investment strategy for your assets, can navigate all of the tricky rules around carry forward and annual allowance which a self-service option is unlikely to offer.
A trusted financial adviser will take the pain away and make the complex, simple.
In my next articles, I’ll be dispelling some pension myths, discussing the value of a good financial adviser and what you should be looking for, and exploring retirement plans, and why you might need one.
I am Jenni Macdonald-Sykes a Chartered Financial Planner for Chevening Financial Ltd working in East Sussex and Kent. I specialise in pensions and retirement planning, aiming to help clients to achieve a sustainable and enjoyable future, and making the complex, simple.
For a refreshing approach to financial planning, please call 07917 855714.
Investment values and income from them can go down as well as up, investors may get back less than their original investment. Chevening Financial Ltd is authorised and regulated by the Financial Conduct Authority, our financial services registration number: 478268.