Reply to: Use assets as "pension"?

[moorfield]

HL SIPP gets my vote too.

If you are of the opinion (like me) that you are unlikely to beat the market over a 20 year period by "actively" trading within your SIPP, take the "passive" approach and stick to the tracker funds - these are by far the cheapest eg. HSBC UK Index is only 0.25%. Always good to diversify a litte too.

[DonkeyRhubarb]

I can also recommend Hargreaves Landsdown and Sippdeal.

The IUKD etf (50 top high yielders from the FTSE350) might be worth considering. It has been beaten down recently due to the pounding of banks and house builders but now might be a good time to start accumulating. It pays a decent dividend which over the long term is usually a good bet.

IMHO, a pension is the best/safest form of tax avoidance that's available.

[IR35 Avoider]

job done - right pensions - where di I get one of them

Sippdeal are the cheapest for single contributions.

Lots of people seem to like Hargreaves Lansdown, who are cheap for regular contributions, but regular contributions seens like a bit of a permie approach to me.

Once a quarter I calculate how much excess money I have in the company and make a single contribution of that amount to the pension. (Login to the web site, fill out a form, send it off with a company cheque to Sippdeal.) The Sippdeal online trading isn't as good as my Selftrade ISA account, but as I only make one transaction a quarter that's not important.

I invest only in ETF's and investment trusts with low charges. Most OEICS and unit trusts charge to much. Many also pay kickbacks (comission) to the broker (Sippdeal or Hargreaves Lansdown) which I don't want to fund. One exception is Fidelity Moneybuilder UK index which my wife holds in her Sippdeal account. When I last looked they were the cheapest UK tracker fund, charging only 0.1% per year, though other admin costs raise their TER to 0.3%, which is similar to other cheap funds and ETFs.

[Olly]

soooo...with corporation tax on the up (and applied to interest) and the risk of IR35 everpresent I've decided to invest a decent chunk in pension.

I'll leave enough in company for rainy days or career breaks (let's say no more than 50 or 60K) and if I never use it then I'll pay it out as a dividend when I retire.

job done - right pensions - where di I get one of them
i only take 6K salary so 20K pension doesn't look lovely to Hector...oooooh well

[moorfield]

Could someone answer this bit please?

"Pension contrubutions are company expenses and therfore tax on them is only paid when I receive the money (not withstanding the 25% tax free chunk)"

by tax - I mean all forms, so that includes corporation

If you have £1000 profit in yourco, you'll pay 21% in corp tax (£210).

Instead if you put that £1000 into a pension, you'll have no profit in yourco, so you won't pay any corp tax.

At 55, assuming your £1000 has kept up with inflation, you can then take £250 lump sum free of tax.

The remaining £750 will be taxed at basic rate over a number of years.

Or if you're really clever with your other investments, assets, income and the pension drawdown thingy, and you live a long time you might be able to get it all out under the personal allowance.

[Olly]

Could someone answer this bit please?

"Pension contrubutions are company expenses and therfore tax on them is only paid when I receive the money (not withstanding the 25% tax free chunk)"

by tax - I mean all forms, so that includes corporation

My way of working, whilst the IT contractor norm, isn't particulalry IR35 friendly so innoculation of assets appeals and 55 is only 20 years way.

[Moscow Mule]

In the very long term outlook 20-30 years that cash may be worth less in real terms.

You'll pay corp tax on any interest earned - rates for small cos are going up in the next few years.

And don't forget the rampant inflation coming our way.

I didn't say it was a good idea, I said that was the idea

[moorfield]

Edit: So the idea is, you have a lump of cash in the company after 30 years of working.

In the very long term outlook 20-30 years that cash may be worth less in real terms.

You'll pay corp tax on any interest earned - rates for small cos are going up in the next few years.

And don't forget the rampant inflation coming our way.

[Moscow Mule]

Informative thread. 1 question, what does this mean: "acceptable to withdraw divs below the tax threshold each year and pay 0% " ?

As far as I'm aware there is no corporation tax threshold. Am I wrong?

He's talking about personal taxation in this instance, not corp tax as this has already been paid on the profits in previous years.

Edit: So the idea is, you have a lump of cash in the company after 30 years of working. You can withdraw this tax free via dividends (10% & -10% tax credit) as long as you stay under the higher rate threshold.

There's no corp tax threshold.

[ace00]

ok, see what you mean.

so, if you have a whole heap of cash in your business account, its perfectly acceptable to withdraw divs below the tax threshold each year and pay 0% tax as long as any corp tax has been paid on profits?

But if that were the case why is there a need for CGT at all as everyone would just do as you say above and pay 0% rather than 10% CGT ????

Informative thread. 1 question, what does this mean: "acceptable to withdraw divs below the tax threshold each year and pay 0% " ?

As far as I'm aware there is no corporation tax threshold. Am I wrong?

[IR35 Avoider]

Realistically I expect an average of about 80K turnover so let's say there's something like 20K left in the company each year after I've had my expenses, paid corportation tax and taken wages and dividend (up to 40K)

If I contract for the next 10 or 15 years then I'll end up with 300 to 400K inthe bank which makes for a tidy pension.

OR

Am I completely missing the point here???
Pension contrubutions are company expenses and therfore tax on them is only paid when I receive the money (not withstanding the 25% tax free chunk)

So I have 3 options
1. Keep the money in the company, pay 21% corporation tax on it and withdraw as untaxed dividends in retirement
(with the added bonus that if I need the bucks in a rush, have time off work etc that I can either close and pay 10% CGT or pay 40% and get my mitts on it pronto)

2. Invest in a pension and pay income tax on the annuity (20%???) but get 25% of the total tax free?

Option 2 is a bit better financially isn't it? with the pros of IR35 innoculation and wider (untaxed?) investment possibilities.
BUT
it ties up my dosh and I can't change my mind

I would put the 20K in a pension, on the grounds that money left in the company could be confiscated to pay an unexpected employers NI bill (following an IR35 investigation) that you might not otherwise pay. If this doesn't persuade you, set your self a target for savings in the company for dealing with the unexpected (e.g. 40K savings would allow you to survive a year without working without cutting personal income) then put the rest in pension. Or, if you really can't make up your mind, plan C; 10K into pension and 10K left in company each year.

[moorfield]

Swings and roundabouts really - you need to do a mixture of both. In what proportion is entirely up to you.

Personally I'm currently favouring the SIPP route - there I have better options of inflation proofing my hard earned fees and there will be some good buying opportunities in the markets over the next few years. And of course it's all money off Hector's radar!

[Olly]

hmmm so what's the "resolution" on this one?

Realistically I expect an average of about 80K turnover so let's say there's something like 20K left in the company each year after I've had my expenses, paid corportation tax and taken wages and dividend (up to 40K)

If I contract for the next 10 or 15 years then I'll end up with 300 to 400K inthe bank which makes for a tidy pension.

OR

Am I completely missing the point here???
Pension contrubutions are company expenses and therfore tax on them is only paid when I receive the money (not withstanding the 25% tax free chunk)

So I have 3 options
1. Keep the money in the company, pay 21% corporation tax on it and withdraw as untaxed dividends in retirement
(with the added bonus that if I need the bucks in a rush, have time off work etc that I can either close and pay 10% CGT or pay 40% and get my mitts on it pronto)

2. Invest in a pension and pay income tax on the annuity (20%???) but get 25% of the total tax free?

Option 2 is a bit better financially isn't it? with the pros of IR35 innoculation and wider (untaxed?) investment possibilities.
BUT
it ties up my dosh and I can't change my mind

[ASB]

But for the army of one man ban contractors that may have anywhere between 100K and say 300K in the business account (after paying relevant taxes/wages etc) they may as well save themselves the 10K / 30K by taking up to 40K per year rather than get the money all in one go and pay the 10%.....

Quite likely. I agree that for most "one man band" type contractors there may well be a case for most of them to do as you describe. But you originally cast the net somewhat wider. Perhaps everyone wasn't what you meant.

[Hex]

Didn't CGT completely change on 6th of April this year, rendering all previous discussion redundant? I think the 10% rate was only if business taper relief applied, I think taper relief has been abolished now. (I'm not to clued up on the CGT route, as I went down the taking dividends over a period of years route, on the grounds that 0% is less than 10%, as someone pointed out.)

Taper relief was abolished. But Entrepreneurs relief now exists on the headline rate of 18% for the first £1m (I think) of Capital. The taper relief is 4/9ths meaning the rate is 5/9ths of 18% which is 10%. It's slightly more complicated by when you can take off the CGT allowance, so it will be a bit less than 10% that you pay probably but 10% is a reasonable assumption for rough calculations.