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Pensions For Business Owners

Setting up a pension as a business owner doesn’t have to be boring. They are an incredibly tax-efficient way to reduce your corporation tax and provide a diversified investment asset that not only looks after you in the future, but is also ring-fenced against any financial risk that you might be exposed to as an entrepreneur.

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What Are The Main Features Of Pensions For Business Owners?
  • Contributions are eligible for corporation tax relief
  • Pensions are ring-fenced as a personal asset
  • Pensions are inheritance tax-free assets
  • 25% of your pension is tax-free when you retire
Grow Your Pension Funds

Pension Tax Relief

When you pay funds into your business owner pension from your business, the funds are simply transferred from your business account to your pension. There is no tax to pay and the amount you have contributed is deducted from your annual profit at the end of the year, making it incredibly tax-efficient.

Once the funds are cleared in your pension, you can invest this into a wide range of asset classes with the aim of the funds growing in value until you reach retirement age, currently set at age 55.

When you decide to take out a business owner pension, the first 25% of the value of the fund is tax-free, with the remainder charged to income tax when it is withdrawn. No national insurance is paid on the pension income in retirement, either.

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Case Study: Business Owner

Pension Case Study

Mr Jones runs a successful IT business. At the end of the year, he has profits of £100,000 that will create a corporation tax bill. He decided to invest £40,000 into his pension from the profits in the business.

He transfers £40,000 to his pension account and his account amends the company profits from £100,000 to £60,000. This has now reduced the profits and therefore the corporation tax exposure for the year and Mr Jones has £40,000 in his pension.

Once invested, this is subject to an annual investment return of 5% per annum for the next 20 years, meaning this £40,000 pension could be worth £106,000.

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Prepare For Your Future

A Great Back-Up Plan

Most entrepreneurs have the vision to sell their business when they retire and this will form the nest egg that they then live off in retirement. As we all know, sometimes even the best-laid plans don’t work out and, when this is in relation to our retirement plans, the wrong outcome can be catastrophic to the future from both an entrepreneur and family perspective.

Business owner pensions are a great backup plan to have. Not only do they help reduce corporation tax for the business each year, but they also help move some cash assets from the business to its directors personally, in a tax-efficient way. Once the funds are inside the pension, they are protected against litigation, business bankruptcy and personal guarantees from banks. They are a protected asset that forms an amazing back-up plan.

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Diversify Your Portfolio

How Can Pensions Be Invested?

There is a wide range of investments available for your business owner pension and this is usually subject to the pension provider which your pension is with. The most common choice is to create a diversified basket of global stocks and shares. The long-term stock market investment return average for a medium-risk portfolio is 6% per annum, however, previous performance can’t be used as a future indicator.

Index trackers can be used, as they basically provide you with a share in every stock in a stock exchange such as the S&P500 to FTSE100 and go up and down based on the companies within the index. A more bespoke approach is also available where a professional investment manager will create a basket of stocks and shares that will form part of your portfolio.

As part of our business owner pension services, we offer full investment advice for all clients as it ensures your money is working in the most effective way and in line with your long-term retirement plans.

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Tax Relief Contributions

What Is A Pension Annual Allowance?

This is the amount each UK taxpayer can pay into a pension each year and use to claim the relevant amount of tax relief. If you contribute too much, you lose the tax benefits, so you need to be careful with how much you contribute.

The maximum amount a UK taxpayer can pay into a pension in one year is £40,000, however, this can be reduced subject to the amount of income earned in that same tax year. To determine the amount you can contribute in one tax year, reach out to our team of Executive Life advisors who can help.

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Key Man Insurance Cover

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Shareholder Protection Insurance

In the event of the death of a shareholder the shares that they previously owned could be inherited by another family member, making this person you may never have met, a key shareholder in the decision making of your business. This is a very common risk that can be eliminated by using a simple shareholder protection policy.

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