Planning for your retirement

Tax benefits could make a big difference to your future wealth

You’ve nurtured your business, but have you paid the same attention to your retirement plans? Some business owners focus a lot of time and energy on making plans for the future of their business, but when it comes to their personal financial future, many discover they are ill-prepared.

My business is my pension
Pensions are not always popular with business owners. Often, you’ll hear a business owner say the common phrase, ‘My business is my pension.’ While that may be true, a pension should still form part of a safety net in case the business doesn’t succeed as planned. Why put all of your eggs in one basket? Have at least two options: your business and a pension on the side.

Sometimes, the business may not provide the level of income you need, and you could have to work far later in life than you’d ideally like to. By shunning pensions, you’re missing out on some significant tax benefits that could make a big difference in the amount of money you eventually have. So, having all your eggs in one basket can be risky.

Flexible ways to save for your retirement
If you own a limited company, pension contributions can be treated as an allowable business expense, helping offset your company’s Corporation Tax bill. Pension contributions can also be tax-efficient in taking money from your business. If you plan to sell your business to fund your retirement, making the most of pension allowances is wise. They can help reduce Capital Gains Tax when your company is sold.

Auto-enrolment has pushed
employers to provide a pension for their employees, but as a business owner, you may want more flexibility in how you save for your retirement. So, what are some of your options?

Holding the property from which you run your business
Self-Invested Personal Pensions (SIPP) and Small Self-Administered Schemes (SSAS) offer the ability to invest directly in UK commercial property. As a business owner or if you are self-employed, this flexibility may be particularly beneficial as your pension can hold the property from which you run your business.

Most SIPP and SSAS providers permit the purchase of commercial property, such as offices, retail units, and factories. However, you cannot generally invest in residential property, such as houses, flats, holiday homes, and holiday lets.

Self-Invested Personal Pension (SIPP)
A Self-Invested Personal Pension provides more control over your pension fund. You’ll be able to make investment decisions yourself, or you can get professional help.

Essentially, a SIPP is a pension wrapper capable of holding a wide range of investments and providing the same tax advantages as other personal pension plans. However, they are more complex than conventional products, and you should seek expert, professional financial advice.

SIPPs allow you to choose your own investments or appoint an investment manager to look after the portfolio on your behalf. Individuals have to appoint a trustee to oversee the operation of the SIPP, but having done that, the individual can effectively run the pension fund independently.

You can choose from a number of different investments, unlike other traditional pension schemes, which may give you more control over where your money is invested. A SIPP offers a range of pension investments, including cash, equities (both UK and foreign), gilts, unit trusts, OEICS, hedge funds, investment trusts, real estate investment trusts, commercial property and land, and traded endowment plans and options.

There are two broad approaches to holding your business premises/commercial property in a SIPP. One is the equity release model, where your business can place premises already owned into the SIPP, effectively exchanging the pension fund already accumulated for the property itself. The other is the funded purchase model, where the property is purchased using the pension fund(s) and placed directly into the SIPP.

Both approaches allow for the SIPP to borrow up to 50% of its net value to fund the purchase and are based on the rules governing SIPPs, allowing for commercial property to be held directly as an investment, including a company’s own premises. In both cases, you, as the business owner, can invest as much or as little of your SIPP in a property as you choose.

Both models also allow the SIPP to borrow up to 50% of its net value to fund the purchase if the pension savings are insufficient, with the rental income used to cover the borrowing repayments. Once invested in your pension, the funds grow free of UK Capital Gains Tax and Income Tax (tax deducted from dividends cannot be reclaimed).

Small Self-Administered Scheme (SSAS)
A company’s Small Self-Administered Scheme (SSAS) gives directors immediate control over former and existing pension funds, which can be invested in their business or property. The SSAS is a pension scheme usually established through a limited company on a defined contribution basis. These pensions are generally set up for the retirement benefit of company directors, family employees, and key personnel.

The SSAS is run by its Trustees, who can be members of the scheme, with contributions made to it by the members and/or the employer. It has similar traits to the SIPP but offers its members more control and flexibility.

The SSAS’s tax and investment benefits are potentially significant for business owners. As with all pension schemes, there are options such as taking a tax-free lump sum and an income in retirement. However, this particular pension has additional benefits available.

Buying and holding commercial property and land within an SSAS is a potentially attractive option, adding security and tax benefits. Within the SSAS, assets are sheltered for future generations and potentially protected from Inheritance Tax.

The loan back is another unique feature of the SSAS that allows you to loan up to 50% of the value of your pension to your company for any use. For example, a business owner could use the funds in their pension for stock acquisition in your company or, if needed, a simple capital injection.

A SSAS provides the key essentials of wealth management and business growth: the flexibility and control over money in your pensions for immediate use today, regardless of age. The ability to set up a company SSAS pension is exclusively accessible to those who operate as directors of their own limited trading companies.

Once established, an SSAS pension can invest in all the areas allowable through a traditional pension scheme, such as stocks and shares, commodities, corporate bonds, and gilts, and it gives members vast additional powers and opportunities.

Up to 11 members can be invited to join the company SSAS. Members act as trustees (Member Trustees) of the scheme. This is usually alongside corporate or professional trustees appointed by the scheme to ensure that any transactions made by the pension scheme adhere to HM Revenue & Custom rules and regulations. This is extremely important to help you avoid potentially significant tax penalties.

Executive Pension Plan (EPP)
Executive Pension Plans (EPPs) are tax-efficient savings plans set up by the company for key employees. The employer (and sometimes the employee) pays into the plan to build a tax-efficient fund, which is used at retirement to provide tax-free cash and a pension income. In effect, EPPs are money purchase occupational pension schemes and operate, for the most part, like any other pension scheme.

EPPs are normally established by company directors or other valued employees for their own benefit. From an employer’s perspective, an EPP can form the core of a benefits package to attract, motivate and reward key executives, plus the financial benefits of contributions being allowable as a business expense and able to be set against taxable profits. Furthermore, there is no NIC liability, so extra pension contributions into an EPP can be made instead of salary increases.

The pension fund is set up under trust, and the trustees are responsible for its day-to-day administration, such as ensuring contributions are paid regularly and benefits are paid out promptly.

There is flexibility in retirement
for the individual, allowing the person to retire early and hand over to others (although benefits can only be taken currently from age 55 (rising to 57 from 2028, unless a protected pension age exists which allows benefits to be taken earlier) or to work well past the company’s normal retirement date).

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

ONCE MONEY IS PAID INTO A PENSION, IT CANNOT BE WITHDRAWN UNTIL YOU ARE AGED AT LEAST 55 (INCREASING TO 57 FROM 2028).

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

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