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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- 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
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owner pension, the first 25% of the value of the fund is tax-free, with the remainder charged to income tax when it is withdrawn.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.
Search For Best Premiums Now 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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How Easy Are Business Owner Pensions To Setup?
It’s never been easier to create and set up a business owner pension. There are many online pension platforms that can offer a pension policy in just five minutes, however, fees can differ from scheme to scheme, as can the investment options. At Executive Life, we offer a full pension review and advice service as part of our business owner pension services.
We will take a look at any existing pensions you might have and offer some advice on the best way to include these in a plan that suits both you and your business. Pensions can be an exciting asset to own as a business owner when invested in the right way, so it might be time to change your opinion on those boring old pensions and see how you can benefit from setting up a business owner pension.
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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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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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.
Other Broker Services
Key Man Insurance Cover
In every business, there are dedicated and talented people who give their all. Whether they are co-founders or employees with specialist skills, these people are vital to the running and success of your business. But, none of us knows what the future brings.
Executive Income Protection
Executive income protection is a tax-efficient policy that pays 80% of your monthly income to the business if you are unable to work due to sickness or ill health, until you return to work.
Relevant Life Insurance Cover
Relevant life insurance is possibly the most tax efficient life insurance policy a company director can have. The policy is paid by the business as an expense and qualifies for corporation tax relief as well as no benefit in kind charge being paid by the director.
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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