Pension as Director of Ltd co.

[Chimichangaz]

I took redundancy last year (March) from my full time role in education, and started work as a project manager on a contract basis in July. Following an accountants advice I set up a ltd company of which I am the sole director. I pay myself a small monthly salary, and top up my income with a monthly dividend. I didn't see this as a long term career move and am hoping to land a job in education again, but based in a school. I had been contributing to the company pension scheme whilst employed (and have done since I was early 20's (am now 49) so it's a reasonable pot. However, I have now not paid any pension contributions for a year and as I hurtle towards retirement (eek) I'm starting to worry. Not sure whether I should consider starting another pension whilst effectively self employed - and if so what would it be? Or wait until/if I land my dream job in a school?

Should add I'm a single parent.

Any advice would be helpful - thanks.

Anyone got any advice?

You would be able to use carry forward which would allow you to make up for not having made any contributions last year so no great rush there.

How much were you thinking of putting aside/what is affordable at the moment? If you were to put these into a NISA for the time being, they can benefit from the same tax efficient growth within the fund as pension funds would enjoy. Then when you are more certain of your employment status you could (within limits) make a lump sum pension contribution from the NISA to gain the appropriate tax relief. This may also suit you as the funds in the NISA will still be accessible in case your circumstances change unexpectedly, unlike the pension where they will be locked away.

That's good advice, I didn't know about carry forward, and I like the idea of a NISA. I will probably make a lump sum contribution at some point this year, so paying into a NISA is a good idea.

Just had a quick look at my pension benefit calculator, and it looks quite healthy even though I haven't paid in for a year, if a little depressing that I have to wait until I'm 65 to claim it! I remember when I first took out a private pension in my early 20's thinking I'd like to retire at 55 - that's 6 years away! Whilst I would love to not have to work every day, I don't even feel close to thinking about retirement!!

Speak to an IFA, there are few points in your post that indicate to me you're not totally clear on pensions, your rights, the tax benefits, company benefits etc. You have potential opportunities in your situation, speak to someone and it could be beneficial.

Thanks whoosh - you're right, and I'm not clear about pensions at all!

You do need to speak to someone about this, I am in a similar situation and doubt carry forward is an issue for you at all (unless you're a very high earner and want to whack masses in your pension). The issue for you is pension growth and sticking the money into a cash isa isn't the same thing at all. With a pension the sooner the money goes in the better.

There are also going to be corporation tax and income tax implications depending on whether you ay the money into the pension directly from the company or whether you pay yourself a dividend and then put the money into the pension afterwards. The way in which you make the contribution can also impact on the amount you can put into the pension.

Take proper advice from your accountant.

FWIW I am about to pay myself a pension contribution directly from the company. Its efficient in terms of corporation tax and means there's no limit on the amount I can put in. Technically I think you're better putting a small amount in personally and then a larger amount in directly from the company but the tax advantage of making the two separate payments isn't massive and its a bit of a faff.

I am in exact same position except been contracting 3 years and done nothing with pensions eek! so interested to hear advice. Should I just ask round for an IFA or should it be a pensions specific one? my accountant is useless and offers no advice, just does my PAYE and company year end.

means there's no limit on the amount I can put in

er yes there is it's called the annual allowance. It's the total amount that you can have paid into a pension by you and any other source.

If the combination of member and employer pension input for the tax year (i.e. contributions paid to money purchase pension schemes and benefit accrual in defined benefit schemes) exceeds the annual allowance, then carry forward could be very useful in reducing or even eliminating any annual allowance tax charge.

forago accountants are not qualified in pensions and cannot legally set one up, so many are not informed (although they should be).

See and IFA, someone that deals in pensions is always better as they'll understand the nitty gritty of the tax benefits, but in fairness for an IFA this is basic stuff.

I wasn't anticipating going anywhere near the annual allowance Whoosh but yes you are of course right. From the OP's post though (given that she's looking for her dream job in a school) I didn't think she was talking about putting anything like that much in.

What I was referring to is the fact that if the OP is taking a small salary and then the rest in dividends then she can only put in a sum equivalent to the small salary (to the extent that it is less than the annual allowance) because her dividends are not relevant earnings. If the Company pays the contribution then she can pay in any amount up to the annual allowance. She is therefore unable to take the money from the dividends, stick it in an isa and then later on put it into her pension (and gain tax relief)

Anyway as I said, she needs to take proper advice.

And can I just clarify that when I suggest an ISA for investment I am talking about using a stocks & shares one - hence some parity with pension funds - and not a cash only one. But totally agree that you really need to sit down with an adviser because there are so many variables to consider.

I use a company for my business
my IFA set up a SIPP that my company pays wodges of money into - that reduce my taxable profit to remarkably little
I'm viewing it as a 5 year savings pot till I can play with it at 55

Also be cautious - all political parties at the moment are seeing pensions as fair game almost for confiscation of cash. If you get to 55 and take your pot as cash you may have to pay 45% tax on it (but with a 25% tax free lumo sum). The maximum you can have in the pension gets lower and lower and lower and the amount you can put in gets lower too.

First of all I would find out how much is the likely pension at 65 from your current pension so you know where you currently stand. At 48 you probably will work another 20 years and if most of that will be in the new employed education job you hope to get then a year or two now without a pension contribution but just making some general savings may be just as good.

Que?
Only an utter twerp empties a SIPP at 55
retirement ages on SIPPs are discretionary
very few people under 50 have DB pensions outside the public sector

25% per year RB, tax free is so simple to do its unreal

Depends if you trust the state though? If in the next 10 years the state will continue to change tax rules on pensions every few years - eg abolish the 75% tax free lump sum you might want to take your money and run.
That trust between pension contributor and state has been shot to pieces with the lower and lower and lower life time cap (now £1m or whatever or £45k a year pension), the abolition of high rate reliefs, the ACT raid and all the rest.

I will never retire and always pay higher rate tax so there will never be a time when if I take the whole pension as cash or buy an annuity when whichever way I take it the state won't confiscate almost half. If I die and am over 75 the whole pension is taxed at the chidlren's highest tax rates i.e. yes yet again 40 or 45%........ Basically no matter how its'd done the state is going to take about half of it and if I don't rush to take the 25% at age 55 tax free the chances are the tax free bit will be abolished too. Also it was 50 when I set up the pension that you could draw it but in what feels like breach of contract the state changed the rules without my consent so now for everyone bar sportsmen etc the minimum age was moved to 55. if they keep changing the rules to stop you taking your money who knows what they will do in future. Clearly the state has decided to make pensions very unattractive as investments, to cap the amount allowed in them and punitive taxes if you take them out or exceed the cap - they are becoming a very dangerous risk.

Most pensions are worth £5,000 a year or lower (including public sector DB)

the fact that a few rich bastards have had their sickeningly generous tax reliefs crushed is neither here nor there

50% of the country earn less than £21k per year

the £40k cap is still twice what they have before rent, heating, food, transport, clothes, water - in a year

get that into your fluffy head and stop wingeing

Couldn't have put it better myself.... Loving your conversion to pension supporter talkinpeace

Yes, I know what people earn. The £1k overall sum is a pension of £45k a year not out of line with what some doctors and teachers will earn actually so the cap is starting to bite on those kinds of people which will no doubt please those who are less well off.

The issue for the very poor though is interesting - if you never work so have no NI you don't get the new £135 or whatever it is state pension. However the state makes up your income with pension credit and housing benefit so what is the point in working at low wages? It is a big issue for the welfare state and if someone who might have got £5k a year private pension blows the lot when they turn 55 should hard working tax payers be giving that person a penny of pension credit and housing benefit?

whoosh
I am not, never have been, and never will be a support of the pensions "industry"
I - for the first time - put money into a pension last autumn
I am using my own company to do so in an extremely tax efficient manner and its a SIPP
as soon as I can (in 5 years) I'll move that money to places where I have more control for less fees

the auto-enrollment tsunami that is arriving on our shores is going to be the mother of all mis selling claims and is an UTTER disaster for most employees

Pulling your leg a little talkin as you were always massively anti pensions and not afraid to say so.

The pensions 'industry' is not part of my observation, but actually you can't avoid it if you buy a pension. A pension vehicle is a great tax opportunity though and should (as it clearly has been for you) be back on the table for consideration for most.

Auto enrolment is indeed a crock, but i don't have the time to climb on my soapbox just now!

whoosh
I'll be honest, I came into some money that I wanted to keep tax free for a few years.
A company SIPP was the cheapest way to do it
I still grate at the whole thing - but my IFA is an old friend so if she shafts me I know where her kids live

The only reason I was willing to go that route is that the money only has to stay there for 5 years
if I was under 45 I would have found another route

yes, auto enrolment might well be mis-selling particularly for the less well off as if you don't contribute the state will pay you pension credit and housing benefit for an impoverished old age. If you do contribute they may well not.

(Meant 25% tax free lump sum not 75% above of course. I could draw down 25% tax free when I'm 55 but the 75% left would be taxable and if it stays in for 20 more years then it might hit the £1m ceiling or be taxed in some other way by the state so it may be wise just to take it and take the tax hit)

but its 25% per year RB - a doddle to work round

AE pensions are going to put 8% of poxy salaries aside, and then charge investors fees
the maths I did meant that a NMW FT worker would need to do 30 years to get a pension of around £2000 a year ......

its 25% per year .... hang on, what is? Not tax free cash, as it isn't. I'm confused talkin.

1. You could draw at age 55 the whole of your pension as a lump sum - 25% of that is tax free. The other 75% might be taxed at 45%, 40% or 20%. If your pension lump sum is say £5k and you have no other income at all then 100% of it is tax free for example.

1. You could instead take 25% of the whole pot when you are 55 or older (not in all types of schemes) tax free and leave the rest in. When you take the rest out it will be taxed at your highest rate. If you expect to have virtually no money when you are older then obviously it makes sense to take it out when you're impoverished and paying very little tax or 20% tax. As I suspect I will pay 40 - 45% tax until I die there will never be a good time for me to take the 75% balance as the state will basically steal about half of that capital sum whenever I take it.

What is interesting is you can take the 25% and not buy an annuity but leave the rest of the capital sum in there. That would certainly work for me aged 55. As the 25% of it tax free may well be abolished by a Government in the next few years and I will always pay very high rates of tax the sooner I take that 25% tax free the better. I cannot envisage say that they would decide to let you take instead 40% or 100% tax free in due course - the movement is all the other way to tax tax tax pensions so the state gets a lot more tax early on as Government run the country like a short term sales manager wanting their commission rather than a steward for generations doing what is right by people.

Most women earn very little, work part time and have tiny if any pensions over and above a £6k state pension so can ignore issues about accessing large lump sums.