As pensions are such an important part of our future prosperity and happiness, we turn again to the capable expertise of Graham Lindsey from Blenheim Wealth Management Ltd to share his thoughts on maximising our retirement funds.
Have you ever thought to yourself – how can (or will) I afford to live in retirement? Have you set an age that you would like to exit your business, whether it be the date you would be entitled to your state retirement pension or do you have plans to retire earlier (or slow down) before then?
It is likely that due to legislation introduced a few years ago you (business owners) pay into a pension scheme for your employees via an auto-enrolment scheme – and it is likely that the employees contribute also …
The earlier you can get as much as you can sensibly afford (within certain guidelines) paid into your pension ‘pot’ the more potential it has to grow and get the benefit of compound growth – one of the great marvels of investing.
As a business owner (providing you invest within the guidelines) you can contribute up to £40,000 per year or up to 100% of your UK Relevant Earnings, whichever is lowest, and possibly receive corporation tax relief, which effectively reduces the amount of corporation tax that your business has to pay.
Did you know that the value of your personal pension/Self invested Personal Pension (SIPP) (when you die) is valued out of your estate for IHT purposes? Therefore they can also be a ‘great tool’ for Inheritance tax planning.
It is not essential to talk to a financial adviser to set up a pension – but it is certainly recommended. However, it is absolutely essential to use the services of a financial adviser to review your pension regularly to monitor if you are on or near your target income in retirement and also that your pension funds are in line with your pension investment risk profile.
Do you have a pension currently or several pensions? If you do – do you know the value? do you have a financial adviser who reviews these for you? Are you paying in a sufficient amount to give you the income you would like in retirement – allowing for inflation? Do you need to review these?
What is your current pension investing risk profile? Are you lower medium, medium or upper medium risk profile or some other risk profile? Is this aligned with the pension investment funds that you have currently? Are your pensions sufficiently well diversified to help reduce investment risk? Do your current pension investment funds need rebalancing to suit your risk profile?
Are you a high earner and have you lost all or part of your £12,570 personal allowance? If this is the case you could effectively be paying 60% tax on part of your income (if your adjusted income is over £100k and this is your total income, after pension contributions and Gift Aid charity donations). By making a pension contribution you could regain some or all of your £12,570 personal allowance. Could a lump sum pension contribution reduce your tax bill?
Paying into a pension as early as possible can also reduce your corporation tax liability (provided certain conditions are met).
Always remember the ‘magical effect’ of compound growth – this can be defined as ‘the power of exponential growth’, this meaning growth on growth. Generally, the earliest access of your personal pensions and Self Invested Personal Pensions (SIPPS) is age 55 (this will be 57 after 2028).
Defined benefits and other types of pensions may have different access ages.
Did you know a SIPP can borrow up to 50% of its value which can be used to purchase a business’s commercial property? The property is leased back to the business and all rent is payable into the pension and used to repay the borrowing. This is tax-efficient as well as providing the extra capital the business needs.
