Why do I need a Director’s Pension?
A Director’s pension is not just about saving for the future, it is a great way to extract business profits for your benefit tax-efficiently and, depending on which type of pension vehicle is used, for example a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS), the pension can even invest in business assets and make loans back to the company.
On top of all that, contributions paid by the business in to the Director’s pension scheme are a fully deductible business expense and so qualify for corporation tax-relief and personal contributions qualify for income tax-relief.
My business is my pension
That’s a common misconception. You may be fortunate and sell your business one day, but many businesses are so dependent on one or two individuals that they may not be attractive to a buyer once you retire. Also let’s be honest, some businesses fail or get wound up when the directors retire.
Further, pensions are held under trust and creditors can not make a claim against your pension scheme under normal circumstances, provided funds haven’t been invested last minute to avoid a claim, and the contributions have been regular and made for the purpose of providing retirement benefits, your pension fund is safe and secure for your benefit regardless of what happens to the business.
Pensions for company directors are also much more tax-efficient than putting money into a bank or building society account or an ISA, for example.
Directors’ pensions are normally funded by company contributions only, but non-business owning directors can also make personal contributions that will qualify for tax-relief at their highest marginal rate.
When personal contributions are paid in by a director the most tax-efficient way of doing that is through ‘salary exchange’ where the personal contributions are taken from gross earnings by reducing the directors salary in lieu of increased pension employer contributions thus effectively benefitting from higher rate income tax relief at source and achieving savings on national insurance contributions for both the director and the company as his employer.
Add to this the investment flexibility that a director’s pension can provide and in certain circumstances the ability to make commercial loans back to the company, directors’ pensions can double up as a very useful business planning tool.
What if I need my money now?
Since April 2015, and if you are aged at least 55, new legislation commonly referred to as “Pensions Freedom” allows more flexibility on how your pension fund can be accessed. However, one has to be careful of the tax consequences as normally only 25% of a pension fund can be taken tax-free and anything taken above that is taxed as income at one’s highest marginal rate but unlike earned income, without being subject to National Insurance Contributions (NICs).