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Six good reasons to have a personal pension

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Thursday October 11, 2012 at 9:00am

Everyone needs to finance their retirement and, despite some of the bad press over recent years, personal pensions are still by far the most tax-efficient way of saving for old age.

It was quite encouraging to see in recently released data from the Office for National Statistics that, although the number of people in workplace pension schemes has stagnated between 2010 and 2011, contribution rates have risen slightly.

But it was worrying that a recent survey by the Prudential showed owners of small and medium-sized enterprises (SMEs) in the UK are still not sorting out their pensions, putting their futures at risk by failing to set aside money for their retirement.

Small business owners may feel they just don’t have the time or money to put aside for pensions. I don’t apologise for sounding like a broken record when it comes to personal pensions and retirement planning, as the cost of not thinking ahead is really very serious. Nobody wants to find themselves without enough to make ends meet in their old age – at a time when it may not be possible to continue working.

Have you reviewed your pension provision yet? If not, here are six good reasons why you should do! 

  1. Tax efficiency while saving
    You can pay in up to £50,000 per year to a pension and the big advantage is that contributions are made out of pre-tax earnings, so the tax man actually adds to whatever you pay in. In simple terms, a £1,000 contribution will cost a 20% taxpayer £800, a 40% taxpayer £600 and a 50% £500. Compare this with a return of 1% or 2% on any ordinary savings you may have and the sums are clearly in favour of pensions.

  2. Business funding
    Significant benefits are available through Small Self-Administered Schemes (SSAS) where you can borrow up to 50% of the value of the fund say to purchase an asset or fund working capital. Alternatively, a Self Invested Personal Pension (SIPP) can invest in private company shares and other esoteric assets such as intellectual property (such as website domains) or patents.

  3. Maximising commercial property
    Where a company has large taxable profits and an unencumbered commercial property, a percentage of the value of the property could be transferred into a pension fund. This is what’s called an in specie pension and contributions will also be deducted from the company’s taxable profits. Another proportion of the property can be transferred in future years of high profits until all of the property is held in the pension fund. This does not deplete cash as the asset is transferred to the pension and is still available for the company to use (on payment of a market rent or lease to the pension). Another benefit is that the asset is removed from business risk and so would not be available to creditors on a company winding up.

  4. Providing for dependants
    It’s a myth that pensions are lost on death. Phased drawdown and scheme pension can have particular tax benefits in certain circumstances for the retiree and also enable payments to be made to any dependants on your death.

  5. Tax benefits on retirement
    When taking pension income, 25 per cent of fund value at retirement is taken tax free and the balance is taken as an income taxed at the member’s tax rate in retirement (without national insurance deductions). Many may well find that a working lifetime of paying tax at the higher rate when accumulating their pension, changes to paying tax at basic rate when taking pension income.

  6. Spreading the risk
    Pensions are only as risky as you want them to be and are less risky than relying entirely on the sale of your business or family home to fund your retirement, as these are at the mercy of the property market and economy at the time. Usually with the help of an independent financial advisor you will need to review what you want to invest and the level of risk you are prepared to take. As with any investment, the more risk you are prepared to take the greater the potential gain. The first step for most people is to start thinking about when they want to retire and what their financial goals are.

Directors wishing to plan their exit from business, those wishing to reduce tax and those wanting to safeguard assets have all benefited from Parker’s pension advice.

Andy Parker
Chartered Financial Planner, Birmingham

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here