We are often asked what pension considerations business owners should take. This largely depends on available funds and the set up of the business, but we are going to share some general thoughts to help.
Firstly, it is very important that you have set up some form of funding to provide you with enough money to enjoy your retirement. Whilst that doesn’t have to be a pension, it is what we recommend in most instances.
Often business owners think their business is going to provide them with a large pension pot, but there many factors determining the value of your business, so we don’t recommend this approach. And, if you are able to sell the business in the future, you have the added bonus of additional funds.
If you employ staff, you will already have had to set up an auto-enrolment pension scheme to provide for your team. The easiest approach is for you to contribute to this scheme for your own pension too. However, you don’t have to do this, and can set up a private pension scheme for yourself.
We recommend you maximise your pension contributions and pay in as much as you can afford. Those payments can be matched by the employer, ie your business. You can set it up so it is just the business paying into the pension, effectively additional salary that you don’t see in your bank account. Of course, this largely depends on how much pension you already have and what you want for retirement. The more you pay in, the bigger the pension pot.
If you run a limited company and your spouse or civil partner is also a shareholder, we recommend them having a pension too. This helps to maximise tax efficiencies.
If your children work in the business, you should ensure they have pensions too. This creates a legacy and is a good way for you to support your loved ones, whilst both they and the business make the most of tax savings.
If you are self-employed there are several options available to you, but the most common are either a stakeholder pension or a self-employed private pension. Please speak to a financial adviser to help you decide if either of these is the right choice for you, or if you need something different.
But it is important to do something. According to the Association of Independent Professionals and the Self Employed (IPSE) around 67% of self-employed people are seriously concerned about their pension. It is estimated that only around 31% of the self-employed are saving into a pension at all.
Setting up a pension is one of the most tax efficient ways of taking revenue out of the business without it incurring corporation tax. And, you don’t pay tax on the pension contributions, rather the Government pays the tax relief directly into your pension. This tax relief is capped and the amount changes in line with the annual budget. For the year 2022/23 it is £40,000 for 100% relief.
You do need to ensure you retain sufficient personal income to live the life you want now. You cannot withdraw funds from your pension before the age you have chosen for retirement, so please bear this in mind.
Pensions are one of the most complicated areas of finance, so we encourage you to seek professional advice before proceeding.
If you would like a pension review, or support in setting up a pension, please contact us on 01344 875 310.