Pensions Pensions Pensions

[escapeUK]

but it will beat inflation and it's tax free too.

Dont be silly. It will beat the pretend rate of government inflation. We all know real inflation is 3-4 times what they claim it to be.

I just renewed my car insurance, same car, no claims, low miles. Gone up 33%. I was not able to find it cheaper anywhere else. I see food items regulary going up 10%. Real things that people buy are going up and up. But memory sticks are down if you can live on those.

[MarillionFan]

Diversification is the key I think - a little bit in everything.

But as a non-IR35 dirty income shifter I prefer fill up my various cash / investment pots in this order.

Warchest / Offset Mortgage
My ISA allowance
Missus M's ISA allowance
SIPP (upto my salary level 6k ish)

Nice call Moorfield. Mines, pretty much the same, but I have moved my entire offset into Bonds as I was paying the bank 0.98% Per Annum on 400k and had 250K offset. So I have used a sliding scale of bonds & interest accounts with the cheapest at 2.75% instant access to a 5 year bond at 5.1%, split in equal parts in both mine and the missuses name.

[GreenerGrass]

Don't forget if your company gross profit exceeds 100k and you like taking virtually everything out of the company each year (keep the cupboard bare for Hector), you could get up to a 60% effective tax saving on the way in.
e.g. make sure everything you earn over 100k goes into a SIPP as company contributions, thus avoiding the 60% marginal tax rate (if taken as dividends instead) due to losing your personal allowance over 100k.
Admittedly this won't affect all contractors but worth bearing in mind.

I also reckon they may cap higher rate pension relief to a max of £20k a year in the next few years although I doubt they will abolish it totally as some are scaremongering.

[lje]

Dont be silly.

It will beat the pretend rate of government inflation. We all know real inflation is 3-4 times what they claim it to be.

At least it beats the top level of pretend inflation rather than the lower one!

It is also a good alternative to those who were saying that a cash ISA is losing money because it doesn't keep up with inflation. Currently this NS&I product would pay 4.7% tax free - which is much higher than any cash ISAs I know of.

[MrC]

Nice call Moorfield. Mines, pretty much the same, but I have moved my entire offset into Bonds as I was paying the bank 0.98% Per Annum on 400k and had 250K offset. So I have used a sliding scale of bonds & interest accounts with the cheapest at 2.75% instant access to a 5 year bond at 5.1%, split in equal parts in both mine and the missuses name.

Does that mean your making a net profit from the mortgage? If so nice work fella

[MrC]

As I said, if you are getting 40% relief on the way in, then it probably tips the balance in favour of a pension.

Surely anyone with a limited is going to get at least 36% saving on tax because they save the ~20% corporation tax AND then the 20% tax from government relief from the PAYE/Dividend? If you are higher rate taxpayer the saving would be even more (40% relief).

This is only true if you are paying yourself dividends which take you above the 40% tax bracket - otherwise the tax is around 20%.

I think i may have confused matters by using the expression "40%" as (very) crudely the cumulative effect of 20% and 20% which is synonymous with the higher rate tax. I should have said 36%.

If anyone can provide an illustration of why you dont also save the corporation tax when paying into a pension (assuming company contribution) that would be most enlighening.

[Hex]

Surely anyone with a limited is going to get at least 36% saving on tax because they save the ~20% corporation tax AND then the 20% tax from government relief from the PAYE/Dividend? If you are higher rate taxpayer the saving would be even more (40% relief).

You are getting confused.

Corporation tax for small companies is currently 21%

If your company had revenue of 40K and paid it all out as dividends it would have to pay 21% on the 40K = £8,400. The remaining £31,600 could be paid to you as dividends. It would come with a nominal 10% tax credit which would mean you have no further tax to pay on the £31,600 as you are below your higher rate tax threshold. So you get 79% of the money out.

Alternatively, you could take your 40K and pay all 40K into your pension. In this scenario you have all 40K in the pension, but any income you take out of it will be taxed at your margnial rate (let's say 20%).

The only tax that is levied in the first example is 21% Corporation tax, there is no additional tax. If dividends put you into the higher rate tax bracket then you have to pay 25% of the net dividend in higher rate tax for any amount over the higher rate threshold.

Your "20% tax from government relief from the PAYE/Dividend" doesn't exist.

[IR35 Avoider]

I've done some digging around on this forum and read up on the Which? guide to pensions and now wanted to clarify my understanding and ask a few questions on what and why others are doing WRT pensions.

1) There seems to be lots of speculation around that ISAs can a be better savings tool for retirement than pensions. I am seeing this as being plainly untrue for any contractor with their own Ltd as they have the ability to save CT on the way in. Correct?

I work on the basis that any money put into a pension will be taxed at 15% on average. A quarter of the money will be tax-free, the rest will be taxed at 20%, assuming I'm a a basic rate tax-payer in retirement, and my state pension uses up my personal allowance. However old people get bigger personal allowances, much bigger than the state pension, so in fact the average rate of tax will probably be less than 15%.

Money passed as dividends (within the basic rate band) and put into an ISA will have been taxed at 21%, or possibly more in future, as small company Corporation tax is heading upwards.

A big advantage of pensions is that they innoculate you against HMRC coming along in a few years time and deciding all you contracts were IR35 caught, and charging you twenty-something percent NI, and possibly higher rate tax, on money that could have been taxed at 15% or less, had you done things differently.

If the money is in fact being saved for spending after the age of 55, then for contractors it's a no-brainer that the pensions route is better.

2) Having read the Which? guide there are all different sorts of pension. Sipps, Stakeholders, Occupational, Group, SSAS, EPP. I have also read somewhere about ".....keeping you pension outside of HRMCs control.." which if i recall correctly involved putting funds into an overseas trust or similar.
Given my circumstances - early thirties, outside IR35 (this contract), one GPP and one Occupational pensions from prior employers I would want to transfer in - which of these above pensions schemes would make the most sense for me and why? (I'm wondering if post A-day, the tax breaks are the same for the above so it just comes down to admin considerations and running costs?)

Admin considerations, running costs and investment options are the considerations.

The most important factor determining your risk-adjusted returns is cost. The cheapest for funds is a SIPP from Alliance Trust Savings, as they rebate all comission, not just initial, but also trail, which can have an even bigger negative impact on returns. If you don't need funds (unit trusts, OEICS etc.) and are satisfied with shares (including investment trusts and ETFs) then SIPPDEAL are cheap and efficient.

If you are a simple index investor who only needs access to a handful of different funds, then a stakeholder with L&G can be cheap, but you must open it through Cavendish Online to get the costs reduced, and you must organise any transfers through them, if you consolidate your other accounts. Otherwise L&G will charge you the mugs price, i.e. the full advertised price which is set higher so they can afford to pay comission to advisors. To be honest, you would probably be better off just sticking with the SIPP option - insurance companies tend to be a nightmare to deal with, even if you are clever enough to avoid their standard charges.

3) I have read that contributions being made must be company contributions not the company making personal contributions on you behalf. This cropped up here. Is the consensus that the ONLY thing that needs to be done is for the provider to know its a company scheme?

As a contractor, just make single contributions quarterly or annually, when you've seen your accounts and know how much you want to contribute. Specify on the pension companies contribution form that it is an employer contribution, and enclose a company cheque. Keep an acknowledgement of the contribution for your company accounting records.

Never sign up for regular contributions, as your income and circumstances are variable, so you can't know what you want to do far into the future, plus there is associated red tape where the pension company has to report you to HMRC if expected contributions aren't received, in case you (as employer) are trying to rip yourself (as employee) off by not making promised contributions.

4) How much should i contribute this year? Conventional pensions wisdom seems to be to contribute a fixed percentage of take home per year increasing that % in later years. I don't think thats the optimal action given the complelexities of a contractors finances. e.g. I'd be quite happy to contribute £50K this year and then nothing for the next 4 years rather than £10k PA. Factors such as future contracts being inside/outside, a change of IR35 legislation/enforcement, returning to permiedom could all affect this. Also would a pension compare favourably to any benefit derived from CG of company closure/entreprenuers relief? I know it's for want of a crystal ball, but what would be the smartest way to hedge my bets?

And yes, maybe I will need to seek an IFA, I'd like to try and understand these things in the first instance as i'm never sure how biased towards a particular scheme/provider they may be. Apologies for the long post

How much to contribute this year depends on your own circumstances more than anything else. I doubt an IFA will be much help. (But they will effectively charge you thousands of pounds for not helping.)

[jetrimby]

One final point. You can't pass pensions on to your heirs (children), whereas you can with ISAs.

As mentioned this is not always correct. IF you die before drawing your own pension then (if you signed in trust) the cash value can go to your inheritors free of any IHT so very tax effecient. people with lots of money are often best not drawing on a pension till they have to for this very reason. Once taking a pension the rules get a lot more complex and partially depends on what annuity deal you sign up to but monies can pass on death and does not need to be taxing if taking the right advice before dead !

[MrC]

The only tax that is levied in the first example is 21% Corporation tax, there is no additional tax. If dividends put you into the higher rate tax bracket then you have to pay 25% of the net dividend in higher rate tax for any amount over the higher rate threshold.

Your "20% tax from government relief from the PAYE/Dividend" doesn't exist.

Thanks for the thorough explanation Hex and sorry for being slow with the dividend tax liability. Still waiting for my first years books to be written up so some of this is still new. For anyone else having similar issues I found this helped my understanding.
Thats cheered me up anyway, thought there was more tax to pay on divs