Pensions
For Business Owners
Directors
Basic Rate taxpayer. 44% discount on pension savings.
Directors can take the greatest advantage of pensions legislation and the tax breaks offered by the government.
A person who has sufficient income in retirement is not going to be a burden on the State so the government does everything it can to encourage people to save for retirement.
An employee saving for their future retirement must do this after a deduction of 11% National Insurance.
A Director can have the company make the pension contribution on his behalf. This not only avoids the employee NI contribution but as the company does not have to make its own 12.8% NI contribution more can be put aside. The payment is allowable against Corporation Tax and is not a Benefit in Kind.
Self-Employed
The advantage of being self-employed is control of your own destiny. The ability to build up a business with an income based on your own efforts can be very rewarding.
But in the rush of everyday life it is too easy to think about today and leave dealing with the future till you actually get there.
Most self-employed people I meet have started a pension in the past or have a small pension from when they were employed. This stops them worrying as much because it is better than nothing. But this is not true. If you have no pension, then you know you have to do something about it. But if you already have one you probably won’t do anything to check if it is the best deal you could get.
On reviewing existing pensions about 30% need no advice on the investment. But the other 70% could improve their prospects simply by making sure that the investment fund is suitable. The long-term benefits could be substantial.
An insurance company pension policy started over 10 years ago is probably paying higher charges than one started now.
A small loss of just 2% a year from extra charges or marginally lower performance will reduce the final value by 40% over 25 years. How far down the 25-year period is your own pension investment?
Entrepreneurs
This is a French word because the traditionally conservative approach to business in Britain tended to shun success, so we never invented a word for it.
Most entrepreneurs would look beyond the narrow confines of the current situation and can see a wider picture. You wouldn’t expect to find an entrepreneurial solution within the ‘boring’ pensions world, but you couldn’t be more wrong.
Successful business people can build up pension funds that are larger than their business. As are saving 50% on the input, paying no tax on the gains or income received and having an asset which can help the business.
Commercial property occupied by the business is the most common asset held by a Self-Invested Pension Scheme. This suits both the directors of limited companies and professional partnerships equally well. The pension fund can borrow money to help with the purchase and funds can be gathered from all those old policies and pension funds that are not doing anything more exciting. The business pays rental to the pension fund, for which business expense relief is available, and the pension fund receives the rent tax-free. What is of particular interest is that this is a way of buying premises out of business income instead of capital expenditure.
Individuals
Improve Investment Returns
There are two ways to improve investment returns:
Have a good investment manager.
Reduce the charges.
These are the two biggest issues that people tend not to consider since starting their pension. You don’t have to stick with the investment link you started with. However, most people do, and you don’t need to be locked into a high charging policy.
The fear of ‘penalties’ is one reason people don’t think of moving, However, the long-term cost of paying over the odds and having a poor return can be huge.
For example, sticking with a policy where the penalty on moving is 3%. can keep the funds locked into a poor company with high charges for many years. The savings possible could be 1% a year on charges. The investment return may be increased by simply adjusting the investment. The funds could recoup the penalty in less than a year.
Future Planning – Ask Yourself
Could I cope on my own if my partner dies next week?
Could my partner cope if I died?
Am I paying too much tax?
When will I be financially independent?
(Will I ever be? or how can I be?)
Can I retire before 67?
These are all questions we are afraid to ask because we won’t like the answer. You could simply never answer them and just see what happens or you could ask for some help. Not all questions can be answered satisfactorily but if I had a pound for every person I have heard say ‘I wish someone had told me that 10/20/30 years ago’.
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