BlackettwalkerltdPWP IFA FU Jan14 directorspensions
FINANCE UPDATES
JANUARY 2014
Directors’ pensions This guide looks at the pension saving options available to business owners who are directors of their companies.
Retirement UPDATE
Planning for retirement
You can save more than this into a pension but you may face a lifetime allowance charge on the excess. The way that this is charged depends on how the excess is taken. If you take it as a lump sum the charge is 55 per cent, if you take it as a pension the charge is 25 per cent.
Running your own business takes time. Business owners can find themselves under daily pressures that mean important areas of financial planning end up neglected. Planning and saving for retirement will be one of the more important decisions you make. As a business owner there are many options available to you when it comes to effective pension planning, many more than for employees. But with more choice comes more tax rules, regulations and complexities, which is why it is important to speak to your financial adviser about your pension options.
Pensions and tax While there are various ways to fund your retirement, a pension is one of the most tax efficient vehicles, thanks to generous tax relief and low tax on gains while invested. Standard tax relief is the basic rate of 20 per cent, but if you pay tax at the higher rate of 40 per cent or additional rate of 45 per cent you can claim up to those amounts in tax relief.
Gosforth Park Avenue, Newcastle upon Tyne Tyne & Wear NE12 8EG 0191 256 9600 [email protected]
When you make a personal contribution to a pension, 20 per cent will be added automatically by the pension provider, to reflect the standard tax relief. But if you pay tax at the higher rates you can claim back up to a further 20 or 25 per cent through your tax return, depending on the level of tax you pay. For example: A top rate taxpayer pays tax at a rate of 45 per cent. When they contribute £8,000 into a pension it will be topped up to £9,600 automatically. They can then claim up to a further £2,000 through their tax return.
Limitations There are limits to the amounts you can invest each year in order to receive tax relief, and there is also a limit on the total pension value you can accrue without attracting a tax charge.
Lifetime allowance For the 2013/14 tax year the lifetime allowance for pension savings is £1.5 million, but this reduces to £1.25 million on 6 April 2014.
There are ways to protect the lifetime allowance, which currently allow you to save up to £1.5 million without paying the lifetime allowance charge even after April 2014. These include Fixed Protection 2014, which will fix your lifetime allowance at £1.5 million without charge, provided no further contributions are made. Individual Protection will also be introduced from April 2014, allowing savers to protect their lifetime allowance at £1.5 million and still make contributions. Anything above £1.5 million will be subject to the lifetime allowance charge.
Annual allowance The annual allowance for individual contributions is currently £50,000 but this reduces to £40,000 in 2014/15, although you can carry forward any unused annual allowance from the three previous tax years.
www.blackett-walker.co.uk
Directors’ pensions Pension options As a business owner there are many pension options open to you. These include:
Small Self-Administered Scheme (SSAS) As a company owner you can set up a SSAS, which is a type of occupational pension scheme. These schemes suit shareholding directors because they allow you to maintain control of your pension arrangements, with some flexibility, and the usual tax relief associated with pensions. As occupational pension schemes, they must be established by an employer. The scheme is set up under trust and is a separate legal entity of which most members are usually trustees.
SSAS investments SSASs have the freedom to invest in a wide range of vehicles, including shares, gilts, unit trusts, deposits, commercial property and land and insurance company funds. When it comes to shares, a SSAS can hold up to five per cent of the sponsoring employers’ shares.
Borrowing The SSAS can also borrow funds from an individual, company or financial institution. If a scheme borrows more than 50 per cent of the value of the pension fund the scheme administrator will have to pay a 40 per cent scheme sanction charge on the amount above the limit.
Loans As an occupational pension scheme a SSAS can lend money to the employer as long as the loan doesn’t exceed 50
Important information The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future.
per cent of the net value of the scheme’s assets. Other conditions apply, such as the loan not being for more than five years and the interest charged being at least one per cent above the average base lending rate of leading high street banks.
Self-Invested Personal Pension (SIPP) A SIPP is a type of personal pension that allows you to decide where your money is invested. Unlike a SSAS, it is the SIPP provider that has overall control of the scheme, although the member makes decisions on investments.
SIPP Investments SIPPs can invest in much the same as a SSAS, including stocks and shares, gilts, unit trusts, deposits, commercial property and land and insurance company funds. The main benefit of a SIPP is that it allows you the control to choose where your money is invested.
Borrowing Like the SSAS, SIPPs can also borrow funds from an individual, company or financial institution. The amount borrowed must be less than 50 per cent of the scheme’s assets.
Loans Because SIPPs are personal pensions as opposed to occupational schemes, they are unable to make loans in the same way as a SSAS. They can make loans to third parties provided they are not connected to a scheme member or employer. Broadly speaking ‘connected’ means relative, spouse or civil partner.
Exit strategy
If you plan to sell your business to fund your retirement it is important to have been a member of a pension scheme for the last three years to ensure you can carry unused annual allowances forward. As the rules stand you may be able to carry forward any unused annual allowance from the previous three years. This effectively allows you to make one-off large contributions to your pension. Doing this can also reduce your capital gains tax liability, as a result of reducing the value of the business sale by some or all of the amount contributed.
Payment of pension benefits You can generally draw pension benefits from the age of 55, although you may be able to draw earlier in some circumstances such as ill health. How you take your pension is up to you, but you are able to take up to 25 per cent as a tax free lump sum and the rest as a pension. It is worth noting that you must not ‘recycle’ your lump sum by using it to pay contributions to a pension scheme, because if you do it will no longer be tax free.
Your options when you take your pension When you take your pension you can decide how your pension is paid to you. The main options include: •
Where your pension scheme pays your pension pot to an insurance company to buy an annuity contract. They will then pay your pension to you for the rest of your life. •
Drawdown
This allows you to take income from your pension pot while it is still invested. You can choose how much you want to be paid each year, within
For many business owners, their business is their pension, which is why it is important to have an exit strategy in place.
This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make any investment decisions based upon its content. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.
Blackett Walker Ltd is Authorised & Regulated by the Financial Conduct Authority. Registered in England Number: 2895559.
Annuities
Please contact us to find out how we can help you to structure your pension.
Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. Errors and omissions excepted.
JANUARY 2014
Directors’ pensions This guide looks at the pension saving options available to business owners who are directors of their companies.
Retirement UPDATE
Planning for retirement
You can save more than this into a pension but you may face a lifetime allowance charge on the excess. The way that this is charged depends on how the excess is taken. If you take it as a lump sum the charge is 55 per cent, if you take it as a pension the charge is 25 per cent.
Running your own business takes time. Business owners can find themselves under daily pressures that mean important areas of financial planning end up neglected. Planning and saving for retirement will be one of the more important decisions you make. As a business owner there are many options available to you when it comes to effective pension planning, many more than for employees. But with more choice comes more tax rules, regulations and complexities, which is why it is important to speak to your financial adviser about your pension options.
Pensions and tax While there are various ways to fund your retirement, a pension is one of the most tax efficient vehicles, thanks to generous tax relief and low tax on gains while invested. Standard tax relief is the basic rate of 20 per cent, but if you pay tax at the higher rate of 40 per cent or additional rate of 45 per cent you can claim up to those amounts in tax relief.
Gosforth Park Avenue, Newcastle upon Tyne Tyne & Wear NE12 8EG 0191 256 9600 [email protected]
When you make a personal contribution to a pension, 20 per cent will be added automatically by the pension provider, to reflect the standard tax relief. But if you pay tax at the higher rates you can claim back up to a further 20 or 25 per cent through your tax return, depending on the level of tax you pay. For example: A top rate taxpayer pays tax at a rate of 45 per cent. When they contribute £8,000 into a pension it will be topped up to £9,600 automatically. They can then claim up to a further £2,000 through their tax return.
Limitations There are limits to the amounts you can invest each year in order to receive tax relief, and there is also a limit on the total pension value you can accrue without attracting a tax charge.
Lifetime allowance For the 2013/14 tax year the lifetime allowance for pension savings is £1.5 million, but this reduces to £1.25 million on 6 April 2014.
There are ways to protect the lifetime allowance, which currently allow you to save up to £1.5 million without paying the lifetime allowance charge even after April 2014. These include Fixed Protection 2014, which will fix your lifetime allowance at £1.5 million without charge, provided no further contributions are made. Individual Protection will also be introduced from April 2014, allowing savers to protect their lifetime allowance at £1.5 million and still make contributions. Anything above £1.5 million will be subject to the lifetime allowance charge.
Annual allowance The annual allowance for individual contributions is currently £50,000 but this reduces to £40,000 in 2014/15, although you can carry forward any unused annual allowance from the three previous tax years.
www.blackett-walker.co.uk
Directors’ pensions Pension options As a business owner there are many pension options open to you. These include:
Small Self-Administered Scheme (SSAS) As a company owner you can set up a SSAS, which is a type of occupational pension scheme. These schemes suit shareholding directors because they allow you to maintain control of your pension arrangements, with some flexibility, and the usual tax relief associated with pensions. As occupational pension schemes, they must be established by an employer. The scheme is set up under trust and is a separate legal entity of which most members are usually trustees.
SSAS investments SSASs have the freedom to invest in a wide range of vehicles, including shares, gilts, unit trusts, deposits, commercial property and land and insurance company funds. When it comes to shares, a SSAS can hold up to five per cent of the sponsoring employers’ shares.
Borrowing The SSAS can also borrow funds from an individual, company or financial institution. If a scheme borrows more than 50 per cent of the value of the pension fund the scheme administrator will have to pay a 40 per cent scheme sanction charge on the amount above the limit.
Loans As an occupational pension scheme a SSAS can lend money to the employer as long as the loan doesn’t exceed 50
Important information The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future.
per cent of the net value of the scheme’s assets. Other conditions apply, such as the loan not being for more than five years and the interest charged being at least one per cent above the average base lending rate of leading high street banks.
Self-Invested Personal Pension (SIPP) A SIPP is a type of personal pension that allows you to decide where your money is invested. Unlike a SSAS, it is the SIPP provider that has overall control of the scheme, although the member makes decisions on investments.
SIPP Investments SIPPs can invest in much the same as a SSAS, including stocks and shares, gilts, unit trusts, deposits, commercial property and land and insurance company funds. The main benefit of a SIPP is that it allows you the control to choose where your money is invested.
Borrowing Like the SSAS, SIPPs can also borrow funds from an individual, company or financial institution. The amount borrowed must be less than 50 per cent of the scheme’s assets.
Loans Because SIPPs are personal pensions as opposed to occupational schemes, they are unable to make loans in the same way as a SSAS. They can make loans to third parties provided they are not connected to a scheme member or employer. Broadly speaking ‘connected’ means relative, spouse or civil partner.
Exit strategy
If you plan to sell your business to fund your retirement it is important to have been a member of a pension scheme for the last three years to ensure you can carry unused annual allowances forward. As the rules stand you may be able to carry forward any unused annual allowance from the previous three years. This effectively allows you to make one-off large contributions to your pension. Doing this can also reduce your capital gains tax liability, as a result of reducing the value of the business sale by some or all of the amount contributed.
Payment of pension benefits You can generally draw pension benefits from the age of 55, although you may be able to draw earlier in some circumstances such as ill health. How you take your pension is up to you, but you are able to take up to 25 per cent as a tax free lump sum and the rest as a pension. It is worth noting that you must not ‘recycle’ your lump sum by using it to pay contributions to a pension scheme, because if you do it will no longer be tax free.
Your options when you take your pension When you take your pension you can decide how your pension is paid to you. The main options include: •
Where your pension scheme pays your pension pot to an insurance company to buy an annuity contract. They will then pay your pension to you for the rest of your life. •
Drawdown
This allows you to take income from your pension pot while it is still invested. You can choose how much you want to be paid each year, within
For many business owners, their business is their pension, which is why it is important to have an exit strategy in place.
This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make any investment decisions based upon its content. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.
Blackett Walker Ltd is Authorised & Regulated by the Financial Conduct Authority. Registered in England Number: 2895559.
Annuities
Please contact us to find out how we can help you to structure your pension.
Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. Errors and omissions excepted.
