Reply to: Pension: Employer Contributions

[IR35 Avoider]

And they keep it all when you snuff it.

No they don't. If you live longer than average you get a share of the proceeds from those that died early, if you die sooner than average they get a share of yours. It's a fair deal, and a mathematically beautiful solution to ensure that on average across all possible futures you spend your last pound on the day you die. There is no way you can simulate this benefit by managing your finances in isolation.

Obviously the pension company gets a percentage of funds under management, but the market is competitive so their rake-off needn't be excessive.

[glashIFA@Paramount]

The yields on pensions are declining all the time. The best rate I could get on mine recently was 6% unindexed. 10 years ago I could have got 12. And they keep it all when you snuff it.

You're right about yields, its obviously to do with the demographics in this country - quite simply, people are living longer and so the money has got to last longer - that's not going to change going forward.

However, with regard to your last comment about them keeping it all when you snuff it - most definately not true. Following on from psns simplification last yr, there are plenty of options available to you both pre and post retirement about what you can do with the funds and who gets them if you die.

[tim123]

The yields on pensions are declining all the time. The best rate I could get on mine recently was 6% unindexed. 10 years ago I could have got 12. And they keep it all when you snuff it.

That's how they manage to offer you 6%, if they didn't keep the pot they'd be offering you 4.

tim

[ASB]

The yields on pensions are declining all the time. The best rate I could get on mine recently was 6% unindexed. 10 years ago I could have got 12. And they keep it all when you snuff it.

Have you checked if you've got any guarenteed annuity rates? I was going to transfer an old scottish mutual policy, when I actually read it I discovered it has a guranteed annuity rate of 13.9%.

[xoggoth]

The yields on pensions are declining all the time. The best rate I could get on mine recently was 6% unindexed. 10 years ago I could have got 12. And they keep it all when you snuff it.

[weemster]

Obtaining maximum tax relief on contributions ie 40% makes sense.

Contributions are limited to the earned income of the year in general but you
get no relief from NIC therefor a standard rate tax payer gets relief at 22%
even though employees pay 11% NIC and employers pay 12.8% NIC. The owner shareholder ends up paying it all one way or another.

You could plan to pay up to £215,000 in one year as long as your salary and
benefits are at that rate but this is not a good route because of the NIC cost.

My view is you can accumulate money in the company for future pension investment just as easily as a pension fund can hold it for you.

[rootsnall]

I've viewed most of the Pension threads and I'd appreciate any views on the following example.

As a director/employee of a limited company my salary (exclusign Dividends, etc) are £10k per year. That is the amount that I receive after NI and PAYE.

I decide to pay all of that into my SIPP pension. This part is relatively simple and clear as of April 2006, as anyone can contribute up to 100% of earnings into a pension capped at £215k (rising by £10k every year thereafter).

I cannot use dividends to boost my personal pension contribution above £10k.

All the easy bits out of the way:
Can my limited company contribute any additional amount into my SIPP just as long as the total amount is below £215k?

Thanks for your answers!!

The 'guide' I am using is if you pay yourself a 10K gross salary then you can pay an employer contribution of approx 10K into a pension without your local tax inspector challenging the tax relief you are claiming. In theory you could pay your whole gross earnings into a pension and pay no tax or NI at all but the guidelines from the taxman leave a question mark over this strategy. I reckon its only worthwhile paying into a pension if you are saving higher rate tax in the process. A mentioned by other posters you are deferring your tax bill until retirement when you will theoretically be paying a lower tax rate.

[ASB]

i presume you're talking about the requirement to personally fund for long term care should the need arise.

I was thinking in general terms really, i.e. wander along to the social and have one of the following conversations:-

"I'm skint, can I have some free money"
"Have you got more than 16k"
"Yes"
"Well come back when you've spent it"

or

"No"
"Good, have this wad of tenners"

[glashIFA@Paramount]

There was quite a long thread on the tax relief position, I would still assert that for most people (standard rate taxpapyer both in work and in retirement) then the relief is really only deferred taxation (although the 25% lump some does gain you about 6%). However, this does assume that alternative investments are made in a tax effcient manner which may well not be possible.

There are also some ways of improving things at retirement time. One possible helper is immediate vesting (I've probably got the details a little wrong but basically):-

Pay 2800 into a pension. Government add 800 tax releif. 3600 goes into pension. 900 tax free lump sum.

Actual cost is therefore 1900. 2700 is used to buy an annuity. If you are a higher rate taxpayer then more tax relief is available.

There is one defnite advantage to a formal pension though. If you have a sizeable pot you will not get any benefit until you have spent it all except for 16k. A pension is protected from this. If one does find oneself seriously ill before retirement benefits may be a help.

i presume you're talking about the requirement to personally fund for long term care should the need arise.

It might also be worth pointing out that bonds are not assessable when calculating your worth and ability to "self fund" care costs.

[ASB]

There was quite a long thread on the tax relief position, I would still assert that for most people (standard rate taxpapyer both in work and in retirement) then the relief is really only deferred taxation (although the 25% lump some does gain you about 6%). However, this does assume that alternative investments are made in a tax effcient manner which may well not be possible.

There are also some ways of improving things at retirement time. One possible helper is immediate vesting (I've probably got the details a little wrong but basically):-

Pay 2800 into a pension. Government add 800 tax releif. 3600 goes into pension. 900 tax free lump sum.

Actual cost is therefore 1900. 2700 is used to buy an annuity. If you are a higher rate taxpayer then more tax relief is available.

There is one defnite advantage to a formal pension though. If you have a sizeable pot you will not get any benefit until you have spent it all except for 16k. A pension is protected from this. If one does find oneself seriously ill before retirement benefits may be a help.

[despot]

Not many investments can give you at least 20% return on day 1. This will be averaged over the lifetime of the pension, so it averages down, but by selecting some half decent funds you can compound 10% or more every year.

It's lower risk and far less haslle than BTL and if you do it through a SIPP you can park your funds in cash when you want change your funds as you desire.

The downside is that you cannot touch the dosh until retirement which is 55 for me. And once retirement does come you can take out 25% tax free and draw the rest as taxable pension. It's not the only source of income I will be relying on, but it's a decent stash of dough which will keep the spam and corn-beef sandwiches flowing!!

[Euro-commuter]

A company-provided pension paid by salary sacrifice goes straight in the pension fund: no Corporation Tax, no Employer's NICs, no employee's NIC's, and no Income Tax. I am on 40% tax so that's a huge saving compared to taking it as salary. Even on basic rate tax it is still a substantial saving. Of course if your company would otherwise be paying you this money as dividends, the saving is less, and in that case it is not salary sacrifice anyway.

In my case, however, it seems that putting money into a company-funded SIPP is better than taking it out as salary and using it to pay down the mortgage, even if the SIPP loses 2% a year.

A curious result of the difference between pensions and ISAs is that it is worth contributing to an ISA right away, even before paying off credit cards (provided that you are going to use the max ISA allowance, and that you will pay off the credit reasonably soon); but this is not so for a pension.

[THEPUMA]

A pension is just a vehicle. Most types of investment you can make personally, you can make through a pension (obvious exceptions are residential property and highly geared other property).

The fact that you are investing the tax as well means that the returns should outperform other forms of investment). So, very simply, if you are getting 40% tax relief, your initial investment would be £10K versus a £6K investment you could make personally after tax costs and that whole £10K will yield an investment return.

However, another way of looking at it is that before one retires, most people would plan to pay off their mortgage and put some money into a pension.

Obviously, pensions attract tax relief. If you are contracting, the marginal tax cost of extracting money which would otherwise be left in the company is probably 28%. This effectively means that the cost of investing £10K into a pension scheme is £7,200.

For an employed higher-rate taxpayer, the marginal tax cost (including employer's NI) is 47.7%. So the cost of investing £10K in a pension is £5,230.

So therefore if you are currently contracting but may one day go into permanent employment, maybe then is the time to make pension contributions and now is the time to pay off your mortgage.

But Glash is probably right when he suggests that a foot in both camps is the safest option.

[weemster]

Yes I agree with your investment approach - perhaps I am a little skeptical following the discussion with my accountant but in terms of returns versus other investments do they really stack up in terms of cost of extracting the funds from the company versus potential growth (I must point out I am not talking about sipps here - these do look viable if you were for example looking to invest in a commercial business premises for example)

[glashIFA@Paramount]

My accountant strongly advises me not to invest in a pension. I am not a higher rate tax payer,no kids,girlfriend has her own occupational pension,we have seperate life cover in place and when I look at the figures regarding making contributions through the company or personally - they don't stack up from a tax effeciency point of view. I am trying to understand why someone in my position would consider a pension over other types of investment and this is before I even get talking about how inflexible they can be - any views most welcome.

Psn contribs must stack up from a tax efficiency point of view, either Corp Tax relief or Income Tax relief depending on if an emp'er or emp'ee contrib. Fair enough to say they might not stack up as much as a higher rate taxpayer but tax relief is tax relief.

Whether or not you think a psn is preferable to other types of investment is of course a personal thing, depends what you're looking for the investment to do. As regards flexibility, much more so following the rule changes last April. I've said before on other threads, ideal situation as far as I'm concerned is to have a foot in both camps. Psns are just an investment after all, albeit with tax breaks, so there's no reason why they shouldn't form part of your overall investment strategy.