Pensions aren’t interesting (at least for most people they aren’t).
But a comfortable retirement and reducing your tax bills is.
Of course, the former leads to the latter, especially for business owners. Whether you are a sole trader, partnership or limited company, a pension could be the ultimate tax-efficient option for business owners.
Unfortunately, over the years, pensions have suffered from poor press and now have something of a tarnished reputation. That means some business owners, who pay more attention to the myth than the reality, are missing out on a very tax efficient option.
Business owners could use one of the following pension options:
- A Stakeholder Pension
- A Personal Pension
- A Self-Invested Personal Pension (SIPP)
- A Small Self-Administered Scheme (SSAS)
Each has advantages and disadvantages, and the correct choice will depend on your requirements, however the tax-efficiencies are identical.
Contributions: If trading under the umbrella of a limited company, pension contributions made by the company on behalf of their employees (including you) are treated as a business expense. These reduce your Corporation Tax bill; effectively giving you tax-relief at a rate of 20%.
If you are a sole trader, or partner in a business (for example via a Limited Liability Partnership) contributions will also attract tax-relief.
Growth: The way in which growth on your pension is taxed depends on the type of investments you hold. However, a pension can be a very tax-efficient way of investing money.
For example, owning a commercial property in a SIPP or SSAS, and renting it back to the company, is a very popular option for business owners. In this case, the pension offers three main benefits:
- No tax is payable on the rental income it receives (good news)
- The company can still offset the rent it pays against tax (even better news)
- If the property is sold for a profit no tax is payable (great news).
Retirement: There are several reasons to pay in to a pension. Reducing tax bills is one, but building a pot of money up to use later in life is probably the most important.
At any point after the age of 55 (from 2028 this will rise to being 10 years earlier than your State Pension Age) you can take money out of your pension. Up to 25% of your pension can be taken as a tax-free lump sum. Anything else will be added to your income in the tax-year you withdraw it and then taxed accordingly; 0% if you stay below the Personal Allowance, 20%, 40% or 45%.
Word about Pension Freedoms
There’s little doubt that the new Pension Freedom rules, which came into effect in April 2015, have changed many people’s views of pensions.
Once you hit the age of 55 you now have complete access to your pension, with no limit on the amount you can take out. Of course, if used unwisely, these new freedoms could mean some people run out of money in retirement. But there’s no doubt they have made pensions more attractive.
As an additional benefit; the new rules also allow pensions to be passed on more easily to younger generations on your death.
How they can help a business
Most people will invest their pension in a portfolio of funds, which are picked to match the level of risk they are prepared to take.
However, certain types of pensions, such as SIPPs or SSASs, have wider investment powers, which some business owners may find particularly useful.
Commercial property: Many business owners like the thought of owning their own premises. The control and freedom from paying rent to a third-party landlord is attractive. But for many businesses, the costs involved and the deposit required mean it is out of reach.
Using the business owner’s pension to buy the property is a potential solution. It isn’t without difficulties and isn’t right for everyone, but paying rent to your pension and being able to borrow to fund the purchase, as well as tax-free returns, can be very attractive.
Loan backs: In certain circumstances, a pension can lend money to your business. The loan needs to be secured and arranged on commercial terms (comparable to those which you could get from the bank). But, for many business owners, borrowing money from their own pension can be an attractive proposition.
Get in touch
There’s plenty to think about before you leap in and start making large pension contributions. For example, you will be locking the money away until you are 55, the maximum you can pay in each year is capped and the value your pension can grow to before you start to pay tax is limited.
But, with advice and careful planning, the advantages of a pension:
- Tax-relief on contributions
- Tax-efficient, and in some cases, tax-free growth on the investments you hold
- Unrestricted access once you are 55
- More flexible options to pass on your pension pot when you die
are certainly worth considering and it is little wonder that many business owners are becoming interested in pensions once again.
If you are a business owner and would like to discuss pensions in more detail, our team of financial advisers in Southampton are here to help you.
Please call us 0800 612 8099 or complete our online enquiry form which you can find by clicking here.