Recent research from Aegon shows many people have not saved enough into their pension to give them a reasonable lifestyle in their retirement.
As a business owner you may not be able to rely on your business to provide you with an income in retirement, so you will need to look at a pension provision.
We share some helpful information, to help demystify this very complicated subject.
Why should you have a pension?
- Whilst you will probably eligible for the state pension this will only cover your basic needs. You will need more than this to live comfortably in your retirement. To find out how much state pension you will be entitled to, please see the section below on the state pension.
- Remember that the amount offered as a state pension may reduce over time, so the more you are able to supplement this the better off you will be in retirement. Investing what you can afford now, will benefit you in the longer term.
- You can have both a personal pension and a workplace one – but there are limits on the total amount you can invest whilst earning tax relief.
- You get tax relief of 20% on your pension contributions, which is claimed by your pension provider and added to your pension pot. For example, if you made a contribution of £100, the amount that goes in your pension is actually £120.
- If you are a higher rate tax payer you can claim additional tax relief on the gross amount of your contribution – reducing your tax liability. For every £100 contribution made, the tax saving for a higher rate taxpayer is £4 and for an additional rate taxpayer it is £5.
- Any contribution from your employer is not a taxable benefit, so is a great opportunity to top up your pension pot.
- When you reach retirement you can choose to have your pension as a regular income, or up to 25% as a tax free cash lump sum, and the remainder as income.
With effect from April 2016, the way your State Pension is calculated is based on your National Insurance (NI) contributions. The full amount of the pension is currently £155.65 per week.
Typically, you will need ten qualifying years on your NI record to qualify for any State Pension. But you will need 35 qualifying years to receive the full State Pension. If you take leave to study, or are a stay at home parent, you can still contribute NI every year by paying voluntary contributions (Class 3 National Insurance).
If you are employed by your company, you can enrol yourself and your employees into workplace pension schemes:
- Auto enrolment – All employers are now required to offer a pension to all eligible staff and automatically enrol them, unless they choose not to contribute. This applies even if the team is only director employees.
- Stakeholder pension – this is flexible and portable, so can move with you if you change jobs. You can even pay in when you are not employed. Future employers may be prepared to make contributions to this too.
- Registered pension scheme – this is the description for any other type of Employer Financed Retirement Benefit Scheme. You will only receive tax relief and any other benefit if it is a tax registered scheme.
The contributions made by the employer into the employees’ pensions is a business deductible expense.
In addition to a workplace pension scheme, or if you don’t have one, you can have a personal pension. The amount of contributions you make extend your income tax rate bands and reduces your tax liability.
Do I need to provide my accountant with my pension statements?
Yes, there is a limit to how much you can contribute to a pension in a tax year. There will be a tax charge on the amount of any contribution paid (by you, employer or 3rd party) in excess of the £40,000 limit each year.
Your accountant can advise you if you are entitled to additional tax relief on your contributions.
If you would like to discuss pension taxation in more detail, please contact us on 01256 406 601.