Reply to: Putting all your earnings into a pension

[Fred Bloggs]

Been contracting for 5 years, first 2 years was spent building up a bench fund that I still have put to one side for a rainy day, that's in cash ISA's with the missus. For the last 3 years I've put £1k a month into my SIPP. It's unlikely I'll be able to pay in any more than this unless I get a big rate increase, even more unlikely at present I reckon.

[contractor79]

yes
when I first started contracting I paid nothing into pension for a few months
then I paid 10% of fees
then 20% of fees
now I pay 26% of fees into pension, however some of the rationale for this is that I'm catching up with payments not made early on in my contracting life
I reckon 10-20% of fees is pretty good

[pmeswani]

ok
so are you guys putting lots in your pension now when you've got the money so you can ease off later and save tax now?

I have about £15k to £16k in my SIPP. Mainly from transferred in pensions. If I had the money to put in, I would put it in as much as I can as often as I can, but within the means of making sure that I get paid if I am benched (like I am now). There is never a bad time to invest into a pension. But always a bad time not to invest into a retirement plan.

Some people will rely on properties to give them a decent retirement... and that's fair play to them. Personally I say... if you can afford to, don't put all your retirement eggs in one basket. As I don't have a property, my main retirement plan objective for 09/10 is to get another £10k into my pension. So, if I get a longish contract with a decent rate, I will hopefully put 4k from my personal contributions and 6k from the employer contributions. But one has to be sensible. Contribute within ones means.

[contractor79]

ok
so are you guys putting lots in your pension now when you've got the money so you can ease off later and save tax now?

[pmeswani]

oh ok, I wasn't aware of that, thanks

Don't get me wrong... medical retirement isn't great... unless you enjoy moaning and doing the garden. Medical cover is great up until a certain point. If the doctor forces you to medically retire... will your insurance cover you?

[contractor79]

It is something my dad was forced to do about 15-20 years ago.

http://handbook.nics.gov.uk/content/...al-grounds.pdf - an example of medical retirement. Some people can claim their pension earlier than the 55 year old rule.

oh ok, I wasn't aware of that, thanks

[pmeswani]

what's that?
I've got insurances to cover from ill-health until age 55

It is something my dad was forced to do about 15-20 years ago.

http://handbook.nics.gov.uk/content/...al-grounds.pdf - an example of medical retirement. Some people can claim their pension earlier than the 55 year old rule.

[contractor79]

What about medical retirement?

what's that?
I've got insurances to cover from ill-health until age 55

[pmeswani]

it's 55 minimum



not for mine, they would release the bid value of the investments if I died

What about medical retirement?

[contractor79]

But can you opt to take your pension early, say at 45? Or is there a minimum aged of 55 enforced?

it's 55 minimum

Also, I guess the one weakness is that if you die young you will have never seen most of the money... and it wouldn't form part of your inheritance.

not for mine, they would release the bid value of the investments if I died

[glashIFA@Paramount]

TazMaN

I am not an IFA, and you would be better taking advice from one for your particular circumstances, I would also make sure your IFA is working togeather with your accountant so the tax angle is correct.

There is now a maximum limit that you can put into a pension as has been posted by others. There is also a life time limit.

Whether its tax deductible for coporation tax is a different matter though. For an expense to be deductible it must be "wholly and necessarily for the purposes of the business".

Whilst in my experience contributions up to the salary paid wont normally incite the interest of HMRC, any payments in excess of this may well do.

You need to take advice from your accountant as to what he/she thinks is the maximum your company could contribute for your circumstances and previous contribution history.

Pension planning is a great tax tool, both for inside and outside ir35 contractors and done efficiently it really uses your money well, good luck with your tax planning.

Phil

The Annual Allowance for 2008/09 is £235k. The issue of relief comes with whether its a personal contribution or an employer contribution.

If you are a £5k a year salary, £30k a year dividend type person and making a personal contribution then you are restricted to a contribution of £5k (you can make a larger personal contrib but will only get tax relief on the £5k - dividends are not pensionable "earnings").

However, an employer contribution of £35k in this instance would get Corp Tax relief on the full amount. In fact, an employer contrib of up to £235k (if the company had the funds!) would receive Corp Tax relief on all of it, regardless of the employees salary. This passes the "wholly and necessary" test, but as always, I'd seek clarification from the Local Inspector of Taxes before the contribution is made.

[expat]

IIUIC at 65 yrs old the age related basic rate allowance is £9k ish pa before tax, and one could use the SIPP rules to extract just up to that amount each year - ie not forced to take more. Unsecured pension I think they call it. (Having read through the Sippdeal smallprint that certainly seems to be implied.)

If your pot can give you that kind of income after the 25% lump sum you'll be doing better than most anyway. Additionally if you sheltered and reinvested the 25% lump sum - his/hers ISAs, national savings etc. - then my back of the envelope calculation (£9k * 4/3) gives you an income of £12k ish pa tax free (in today's money of course).

And remember that if you manage to get capital gains in any investments there are several ways of not paying CGT on them:
- hold in ISAs
- some NS&I products
- Gold sovereigns
- anything up to the CGT Annual Exempt Amount (currently 9600.00)
- your main home.

So between the tax-free 25%, the income tax personal allowance, and judicious realising of capital gains under the exempt amount, you can get quite a lot out without paying any tax.

[moorfield]

You get 40% tax relief on the way in, and even though you would be taxed on the income from the pension, you can take part of it as a tax free lump sum.

IIUIC at 65 yrs old the age related basic rate allowance is £9k ish pa before tax, and one could use the SIPP rules to extract just up to that amount each year - ie not forced to take more. Unsecured pension I think they call it. (Having read through the Sippdeal smallprint that certainly seems to be implied.)

If your pot can give you that kind of income after the 25% lump sum you'll be doing better than most anyway. Additionally if you sheltered and reinvested the 25% lump sum - his/hers ISAs, national savings etc. - then my back of the envelope calculation (£9k * 4/3) gives you an income of £12k ish pa tax free (in today's money of course), in addition to any other investments you might have sheltered previously.

[pmeswani]

It is probably the safest form of "tax avoidance". You get 40% tax relief on the way in, and even though you would be taxed on the income from the pension, you can take part of it as a tax free lump sum. With the benefit of hindsight I would probably have gone PAYE and done this instead of getting involved with IR35 or whacky schemes.

PS. if you get a SIPP you can also manage it yourself and have access to very wide range of investments

I found with in my SIPP that any personal contributions (up to the salary limit) attracts 25% tax rebate on the basic rate. So you may wish to consider making both company and personal contributions when taking out a SIPP (if you decide to go down that route).

[expat]

...
Also, I guess the one weakness is that if you die young you will have never seen most of the money... and it wouldn't form part of your inheritance.

No: as long as it is a pension fund (e.g. a SIPP) then it is your money; or your estate's if you die.

After you convert the fund into an annuity (if you do), then the conditions of the annuity determine what happens if you die. It is common (but by no means obligatory) to buy an annuity that ceases on your death, because the payouts are larger then (obviously).