Pensions – how company directors can review their existing plans

Pensions are complicated, so how can you be sure you are doing the right thing? We all want to retire but with a potential pension minefield out there, most people fail to actively plan their route to retirement and lack confidence in their pension decision making.

As a Chartered Financial Planner I get asked a variety of pension-related questions on an almost daily basis, such as; how much should I save, how much can I contribute, where should I invest, when can I retire and what is ‘Drawdown’?

Rest assured it is never too late to start planning for your retirement, but the sooner you start thinking about how you will generate the income you need to fund the lifestyle you want, the more likely you will be to achieve your goals.

There are a few straightforward steps that directors can make to get the most of the allowances and taxation benefits to which they are entitled;

1. Make the most of your pension contributions allowances
2. Don’t rely on the State Pension
3. Plan your exit strategy & retirement goals
4. Review your existing plans
5. Get professional advice

Pension Allowances – How a director could make a contribution of up to £160,000

The maximum amount you can save towards your pension per tax year is £40,000 – so how can you invest £160,000?

The use of something called ‘carry forward’ allows unused pension annual allowance from the previous three tax years to be carried forward and added to the annual allowance for the current pension year.

Essentially you are potentially able to contribute four lots of £40,000 from your business to fund the £160,000 pension payment. The result would save a company 19% (£30,400) in Corporation Tax for the year. Assuming the contribution passes the ‘wholly and exclusively test’, there would be no liability to income tax or national insurance on the director or business.

In the above example, assuming a gross contribution of £40,000 pa from the business with a moderate net growth rate of say 4% pa, it might be possible to achieve a fund value in excess of £1m by the time you reach 65. This is from a starting point of nothing at aged 50.

Exceptions where your annual allowance will be lower:

• Adjusted income over £150,000
• If you have flexibly accessed your pension income

Don’t rely on the state for your retirement, whenever it comes

Whilst the basic State Pension has increased, so has the age at which it is paid. The age at which a 50 year old will receive their State Pension is 67. The full basic entitlement is £168.60 per week, depending on your National Insurance record.

Plan your exit strategy and have your retirement goals ready

Many directors say that their business is their pension but a sale can often take several years to negotiate the right deal. Equally, the complexities and potential pitfalls associated with selling a business may not afford you the opportunity of retiring as and when you want.

Having the flexibility of a pension behind you will certainly ease the pressures of disposing of your business and focussing on your income and capital needs in retirement is crucial to your planning.

Review your existing plans

It is vital you are maximising the returns from your existing assets. Spend time reviewing your existing plans and consider the following:

1. Administration – how many plans do you have and can you manage the paperwork?
2. Past performance – how does it compare to its peers?
3. Risk – how do you quantify risk – are you taking too much or too little risk?
4. Choice of investments – are there alternative investment options that might perform better?
5. Charges – how much are you being charged for the level of service you receive?
6. Flexibility – does your pension offer Flexible Access Drawdown, ‘Small Pots’, Phased Drawdown, full or partial annuity purchase?
7. Death Benefit – rather than just pay the value of the pensions to your beneficiaries, does your pension plan offer dependent pensions, nominee and successor Flexible Access Drawdown?
8. Guarantees – do your plans have any built-in guarantees?

Get professional advice

Getting professional advice can have a significant impact on your income in retirement. Considering large pension contributions, reviewing existing plans and retirement goal planning is complicated and you should seek advice before proceeding.

To help you in your retirement planning we will work together to:

• Keep you up to date and on track with requirements
• Offer you choice and flexibility to suit your circumstances
• Provide flexibility for your retirement planning ensuring you have the right options at retirement
• Give you on-going advice on maximum funding levels
• Help improve your tax efficiency during the saving and spending phases
• Schedule regular reviews to ensure your investments are performing as expected
• Assist with Lifetime Allowance planning