Pension planning tips for startups and entrepreneurs

Working for yourself and worried about your pension? These tips will help you plan properly.

When you work for a company, all of your pension issues are very often taken care of for you. Your company pays into a pension that you contribute to, and it’s all done in the background by those friendly people in the wages department.

However, when you take the leap and start up your own business, your pension may well be the last thing on your mind. Any money you have spare will probably be needed elsewhere.

FTAdvisor found that two-thirds of entrepreneurs admitted to having no pension provision, which is a worrying statistic when you consider only 32 per cent of employed people state the same.

But as a business owner, there are some enticements for investing in a pension that could work out to be an efficient way of using any spare cash, or indeed, making the most of any money you have coming into the company.

Your first step, when considering any investment, especially one involving business funds, is to discuss any ideas with your accountant and also your pension advisor.

It’s unlikely yours is the first business they’ve discussed the subject with, and they may have access to a whole library of investment products that they can check against your particular circumstances.

Not all businesses are the same, and together with government grants and other incentives, there may well be specific schemes that work well in your particular industry, or which will give an added boost to any invested cash.

But, with that in mind, here are several ideas that you could consider and investigate more.

Pay into a pension and pay less tax

Where your business is structured as a limited company, making pension contributions from your business into your own personal pension or Self Invested Personal Pension (SIPP) can have the following benefits:

• The payments are usually treated as a normal business expense, and so you effectively gain corporation tax relief on these

• The payments are not subject to employer’s national insurance (13.8%) either

• You build up an investment fund away from your business, giving you diversification and security (forget: my business is my pension; think – my business and my pension as a double-barrelled strategy to build your wealth)

Yes, the money is tied into your pension pot until you are 55 under current rules but compare the tax rate on extracting profits in this way (i.e. none at source), with

• taking the money as salary/bonus (taxed at up to 45%, plus National Insurance)

• or dividends (at least 32.5% if above the basic rate tax band).

• Plus, if the worst happens to you before you draw on your pension fund, the proceeds are available tax-free to your family and usually do not form part of your Estate for inheritance tax.

HMRC rules allow pension contributions of up to £40,000 per tax year for individuals. Personal contributions are restricted to no more than 100% of salary but for business owners who pay themselves a nominal salary and perhaps draw the rest of their income as dividends, the company can make up the difference and then some: where someone has been a member of a pension scheme (perhaps an old employer’s scheme) but has not paid anything in recently, contributions of up to £160,000 may be possible using something called “Carry Forward” – this allows you to go back 3 years and make good any unused allowances.

Minimise investment costs while you grow your fund

Keeping investment costs low can be especially important during the “accumulation” phase of retirement planning. An apparently small difference in costs can make a big difference for a long-term investment.

According to Vanguard, the low-cost investment fund manager, an entrepreneur paying annual costs of 0.5% p/a on a £10,000 pension investment made at the age of 30 would have retained 86% of the gross investment growth on that pot by the age of 55 – giving them a fund value of £47,911 assuming a 7% annual return before costs.

However, if the same investment was subject to a 1.5% annual charge, the fund value at 55 would be £37,406, keeping only 62% of the gross investment return on that money, the rest would have been lost due to the charges themselves and the investment growth not achieved on the money deducted as charges.

Commercial Property purchase in a SIPP

Paying Rent to someone else? Why not have your own SIPP as your landlord.

Where your business already has, or needs, its own business premises, you can use money within a SIPP to purchase some or all of the property, potentially co-investing with colleagues or other individuals.

This means that instead of paying rent to someone else, your own pension fund could be receiving those monthly or quarterly payments and the money goes towards building up your pension pot.

Clearly, you may need a substantial fund to achieve this: using carry forward referred to above may help with this, and it is also worth knowing that this type of purchase can use a mortgage of up to 50% of the value of the SIPP(s) fund involved.

Employers’ Responsibilities

Where you employ people, there are also government requirements to set up workplace pension arrangements for your staff. Non-compliance with these can lead to hefty fines. You can set up arrangements using an IFA or by dealing directly with organisations like NEST [https://www.nestpensions.org.uk/schemeweb/nest.html].

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE. TAX RELIEF ON EMPLOYER PENSION CONTRIBUTIONS IS AT THE DISCRETION OF HMRC.