Managing Your Cash Flow

Pension planning for SME Owners

6 min read

12 April 2019

Pensions are something that we typically think about later on in life, but every business owner should prioritise it. There are a number of different pension vehicles that business owners can consider in retirement and we’ve put together this guide to help you navigate your options.

The Government have cottoned-on to the fact that too many people have decided that they are going to become landlords and look to build property portfolios to fund their retirement and so, whilst this is still an option, changes made to Stamp Duty, to offsetting interest on buy-to-let mortgages, not to mention the removal of the 10% wear and tear allowance means that the allure that property investment once held has lessened.

Setting up a Limited Company to hold the property is an alternate option but properties held in your own name cannot be moved into the business without crystallising the gain, incurring a Capital Gain of either 18 or 28% in addition to Stamp Duty on the transfer to the company (at an increased rate).

Investments…

There are a range of investment structures that one can choose to assist with retirement. Stocks & Shares ISA’s are a fantastic means to take advantage of tax-free growth, as well as tax-free income in retirement since any dividends on shares will remain tax-free and not impact your dividend allowance.

Unit Trusts/Collectives can be used as a retirement mechanism

If you are savvy enough to switch portfolios from income to accumulation funds or change underlying funds or indeed swap with a legal partner, you can take advantage of capital gains and use the capital gain from the portfolio (within the capital gains allowance) to generate £11,700 of ‘income’ tax-free each tax-year.

Venture Capital Trusts provide not only 30% income tax-relief on any investment made, but also a tax-free dividend that can supplement income. Whilst these are a higher risk investment (investing in early stage companies), the tax-reliefs are attractive. Other – There are various other tax structures that can be used to generate tax-efficient income in retirement.

Private pensions

Taking out a personal pension in addition to your workplace pension to boost your retirement funds or to invest differently to your workplace pension can be extremely beneficial in the long-term. A personal pension is run by a pension provider, which will claim tax relief at the basic rate and add it to your retirement fund. If you’re a higher rate taxpayer, you can claim the additional tax as a rebate through your tax return.

With pension tax-relief costing the Chancellor more than £50 billion last year, it makes sense to make any private pension contributions as soon as possible.

Limited Company Pensions

Not only is this a tax-efficient tool for extracting funds from a business, but it is also beneficial to the company accounts. Company pension payments are deductible as a company expense and can, therefore, reduce or wipe out any liability to Corporation Tax, thus using pension payments as a tax-efficient tool for managing both company tax and profit extraction.

To qualify for the deduction during that accounting period, these contributions to pensions need to be paid before the company’s financial year-end. In addition to this, employers are exempt from National Insurance Contributions on pension contributions.

Use pre-tax profits from your business

Furthermore, as an owner of your business, you might be able to contribute up to £40,000 to your pension this tax year using pre-tax profits from the business.

You can also use up unused claims for the previous three years as well, using a pension ‘carry forward’ rule – potentially adding up to £160,000 to your retirement pot. Conclusion: According to research by Schroders, a 25-year-old who would like to retire on a two-thirds pension at 65 should be tucking away 15% of their salary each year.

At that savings rate, an average annual return of 2.5% above inflation would create a pot large enough to produce a retirement income to meet their target. But if that person was to save 10% of their salary, the annual return they’d need would shoot up to 4.2% over inflation.

If they were to save only 5% of their salary (the current overall minimum contribution rate for auto-enrolment), they may need returns that exceed inflation by 7%. Wait to 40 and it needs to be at least 20% of your income, increasing in line with your rising income.

In summary…

Whatever tax vehicle or blend of tax vehicles you choose, it is essential to do something. No business owner wants to work to the ground, so appropriate planning is key. And with all plans, there should be a robust review process. This should be there to ensure that funds are correctly invested, and target goals are regularly reviewed.