Running a business, providing for your family and planning for retirement can be an overwhelming challenge at times, but it doesn’t have to be.
This blog aims to provide you with some tips on how to start using your business to support your retirement goals, provide your family with more security and take advantage of some generous tax saving tips, a kind of three-birds-one-stone effect.
If you haven’t got time to read this blog, I understand because you’re a business owner – enough said. So I have thought ahead and listed each step briefly below and have also created a handy PDF crib sheet to download, save, print and use when planning for your retirement, which outlines more detailed information that you should know about your pension.
- Pension contributions are deducible as a business expense
- How generational planning can provide security for your family
- Buying a commercial property using your pension
- Support your retirement goals
- Using your pension as part of an exit strategy for business owners
Pension contributions are deductible as a business expense
If you are self-employed or have a limited company, placing funds into your pension can bring significant tax advantages. Pension contributions can be treated as an allowable business expense and offset against your company’s tax bill.
If you contribute from your company’s pre-tax profits this would be classed as an employer contribution. Your company would receive tax relief against corporation tax, so the company could save up to 20% in corporation tax.
If you’re a sole trader: This will be the profit before tax which you declare to HMRC in the current tax year.
If you work for your own limited company: This will be any salary you are paid, plus any taxable benefits, before tax.
Another benefit is that employers don’t have to pay National Insurance on pension contributions.
How generational planning can provide security for your family
Your pensions will not be subject to Inheritance Tax as it never becomes part of your estate, this has made pensions a useful generational planning tool.
Your beneficiaries (who you leave your pension to) may need to pay Income Tax when taking your pension. However, if you die before age 75 your pension will be passed on tax-free, but if you die after age 75 they will have to pay tax which is dependent on if they take a lump sum (taxed at 55%) or as an income (taxed at 25%).
By using an Expression of Wishes form from your pension provider, you can nominate who your pension will be passed to on your death (morbid I know). With the use of generational planning, it is possible to pass unused pension funds though multiple generations.
(Find out what this all means in the PDF crib sheet PDF crib sheet)
Buying a commercial property using your pension
Yes that’s right, you can actually buy a commercial property inside your pension. Its common for business owners to buy the premises they work from so that the business ends up paying the rent and their pension fund benefits from the income.
There are some great tax benefits to using a pension to buy commercial property, from capital appreciation, rental income, no capital gains to pay when you sell and you will not have to pay tax on any income the property generates if you hold it within your SIPP because it is a tax wrapped.
A SIPP is a Self-Invested Personal Pension, a type of pension.
Support your retirement goals
Retirement planning is a crucial part of ensuring a secure and comfortable retirement. The sooner you invest in a pension the more you will have available to make the most of your of your retirement.
With your focus no doubt on the day-to-day and plans for the future of your business, it can be difficult to spend time planning for retirement. Using your business and pension for your retirement planning can create a tax-efficient, cost effective way of saving and also providing a nice little nest egg for you and your family, even if you go to glory earlier than expected (Morbid again, sorry).
As a business owner, pension planning should be part of your overall planning for how best to finance your business and how to eventually realise the value you have built up.
Pension funds can now form part of an exit strategy for business owners
Business exit strategy and retirement planning are frequently overlooked when you are deeply involved in the day to day operations of your business. An unplanned approach to retirement and the sale of your company will almost certainly not maximise the best value for your business.
If your plan is to sell your business to fund your retirement (which sounds like a great plan to me), paying large contributions into your pension will both provide a huge increase in the size of your pension and reduce the capital gains on the sale of the company.
This exit strategy takes an immense amount of planning and would need to be conscious that you do not exceed the lifetime allowance without incurring a tax penalty.
I hope you’ve found this blog useful for your retirement planning. I’ll leave you with a few suggestions regarding seeking financial advice.
Behind these 5 tips I have provided you with today is a never ending list of ways to benefit you and your business and each requires professional advice. Here’s a few things to look out for when you’re seeking specialist pension advice:
- Ensure your adviser is experienced in specifically advising on pensions for business owners. i.e Purchasing a commercial property, which is incredibly complex.
- Check that your professional adviser is regulated – look on the FCA register
- As well as taking advice on setting up any savings or pension plans, advice can be particularly valuable as you reach retirement or before selling your business.
Please note that tax rules change regularly, and the actual tax benefits you receive will depend on your individual circumstances.