The great thing about having your own Limited Company is that is doesn’t just have to support you while you’re working.
With a company pension scheme, you can use the money you earn to plan for your retirement – and help improve your tax efficiency. Whilst we have set out some of the general considerations, you should consult with a financial adviser for advice specific to your circumstances.
In recent years, the funds available to the government for paying the state pension have taken a battering. Firstly, more people out of work has meant less money for the treasury in income taxes. Secondly, many companies have seen their profits decimated, resulting in less money paid in corporation taxes. Thirdly, people are living longer. This means they’re claiming their pensions for more years than government statisticians bargained for.
Unsurprisingly then, the government wants us to take responsibility for our pensions into our own hands. It has passed legislation forcing employers to offer company pensions to their staff, while offering tax incentives to everyone who pays into a pension.
Your company pension options
Pensions are split broadly into two types. Each has its advantages and disadvantages, depending on your needs and situation.
Final salary pension
As the name suggests, the final salary pension, or defined benefit scheme, is geared up to pay you a percentage of your salary when you’re eligible to start claiming. Exactly what that percentage is will be determined by factors such as:
- how long you pay into the scheme
- what your salary is
- the accrual rate of the scheme
This type of pension is mainly used by large employers, although its popularity is declining, due to the cost and risks to the employer.
Money purchase pension
The most common type of pension nowadays, the money purchase pension (aka defined contribution scheme) comes with an element of uncertainty about how much you’ll receive when you retire. Factors affecting this include:
- how much money you pay in
- how well the pension fund performs
- what choices you make when you retire
With both types of pension, the funds you pay in, along with those of others in the scheme, are invested.
Tax relief on your company pension contributions
As a business owner, you’ll get your pensions contributions topped up by 20 per cent by the government. This effectively is the tax you’ll have been liable for on that money. The government gives this back to you in the form of a pension payment top-up, making your pension contributions tax-free.
If you’re a higher rate taxpayer, you can claim back even more through your self-assessment return.
The tax benefits of setting up a company pension scheme are considerable. They’re even better than paying yourself dividends, as these are still subject to tax (although you can’t spend the money now).
It’s never too early to start paying into a pension scheme – the longer you pay in for, the more you’ll get back when you retire. That said, bear in mind that your income may fluctuate over the year, so you’ll need to decide on a contribution you can keep up through the lean months as well as the busy ones. It’s also a good idea to review your pension’s performance regularly to see if you need to top up, make a one-off contribution, or increase your contributions.
You may find it useful to speak to a financial adviser, who can give you expert advice specific to your circumstances. With advisers no longer allowed to receive commission for certain products, their advice will be impartial, but you might find you are charged for their services and advice.
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