Anyone setting up or running a business must be able to prioritise their time and resources, which might see pension planning pushed down the agenda. But creating a savings plan is one way to ensure a secure and comfortable retirement.
Pensions saving has become simpler. The sooner you invest in a pension the more you will have available to make the most of your retirement. Pension law has changed. Between October 2012 and February 2018 every business will be obliged to run and contribute to a pension scheme for all eligible employees. Where an employer does not already provide a pension scheme, they will need to identify a scheme which they can use to fulfil their duties when the legal change is set to affect them.
This briefing outlines:
- The benefits of committing to a pension scheme.
- Using your share of the business to help fund your retirement.
- Other forms of pension funding.
- Alternatives for retirement financing.
- Planning for your retirement.
- Where to get advice.
Rising life expectancy has put pressure on retirement planning, highlighting the real danger that you might outlive your savings. By taking action early on, there is a greater chance you will be able to adequately fund retirement.
1.1 Decide how much you need to save to live comfortably in retirement.
- Identify your ideal annual income using a pension calculator (see 6.1) and work out what you need to save to achieve that.
- Allow for inflation when working out targets.
1.2 The earlier you start, the less expensive it is to save.
- A 50-year-old who starts saving for their retirement at the same time as a 40-year-old may need to save three times as much every month to secure the same level of pension saving.
Since the advent of a simplified tax regime, business owners can make much more of their pension arrangements.
2.1 By setting up a Small Self-administered Scheme (SSAS), company owners can use the pension fund to lend money or to invest in the business.
- SSASs fall under the same tax regime as other registered schemes and offer the same advantageous tax breaks.
- Employer contributions are unlimited and deductible against corporation tax.
- SSASs can hold up to 5% of their assets in the sponsoring employer's shares.
- An SSAS can lend money to the employer provided the loan does not exceed 50% of the net value of the scheme's assets.
- SSASs can borrow to invest or to pay a member's benefits. But borrowings must not exceed 50% of the scheme's assets.
2.2 Pension funds can now form part of an exit strategy for business owners.
- If you plan to sell your business to fund your retirement, paying large contributions into your scheme will both provide a pension and reduce the capital gains tax on sale of the company.
- However, you cannot exceed the lifetime allowance without incurring a tax penalty.
2.3 A pension mortgage is a tax-efficient way of repaying a loan on a property.
- You make interest-only payments on the mortgage while at the same time paying into a pension. At the end of the mortgage term, you use the tax-free lump sum from the pension to pay off the mortgage.
3.1 Executive Pension Plans (EPPs) are contribution plans provided by the employer and run by a life assurance company.
- Employees are not liable to income tax or National Insurance contributions (NICs) on payments made to an EPP.
- Contributions are subject to tax relief limitations.
- Members can transfer existing plans into their EPP.
- The frequency and amounts payable to an EPP are usually flexible.
3.2 Self-invested Personal Pensions (SIPPs) are similar to standard personal pensions but allow greater investment freedom.
- SIPPs are governed by the same tax, contribution and eligibility rules as personal pensions.
- SIPP investors can control their investment strategy and hire a fund manager or broker to carry out investment decisions.
- SIPPs are run under trust law although the member can be the trustee if the plan is overseen by an independent administrator.
- Administration costs can be high.
3.3 Pensions Salary Sacrifice allows employees to exchange earnings for non-cash benefits which means both employer and employee make NI savings.
- Employee pension contributions are converted into employer contributions which do not incur NI.
- The employer can pass NI savings to employees as a bonus contribution to the plan.
3.4 Funded Unapproved Retirement Benefit Schemes (FURBS)/Employer-Financed Retirement Benefits Scheme (EFRBS) were set up to provide benefits for employees earning more than the salary cap.
- Tax reforms replaced maximum salary with a lifetime allowance making FURBS/EFRBS less relevant.
Pensions may be the most tax-efficient way to pay for your retirement but they are not the only option.
4.1 Selling property at retirement offers a possible lump sum that could be used as a pension.
- Using property as a pension means you can access the money before normal retirement age.
- You have more control over the asset.
- You are reliant on favourable property prices and the ability to sell the property when you want to retire.
4.2 Individual savings accounts (ISAs).
- All withdrawals from an ISA are tax free.
- Money can be accessed at any time.
- ISAs could be beneficial for basic rate taxpayers, but higher rate taxpayers are likely to be better off in a pension. From April 2017 the ISA limit will increase to £20,000. There will also be a new Lifetime ISA for adults aged under 40. Up to £4,000 can be saved each year and the Government will add an additional 25% bonus.
5.1 Choosing the right time to retire is crucial and is often determined by how you have funded your pension.
- If you are a member of a final salary scheme, your only options are to take a tax-free lump sum and an income. The income is guaranteed until you die.
- Defined contribution members can take a tax-free cash sum, usually up to 25% of the total fund, together with an annuity or flexible income drawdown (or both). You may be able to take more than this in certain limited circumstances.
- The new rules make it possible to claim a pension but continue to work.
- If you are selling a business to pay for your retirement, seek professional advice on the exit strategy.