Reply to: What percentage of your earnings do you clear?

[Waldorf]

I agree with spreading your investments, but pension money is usually invested in the same things as an ISA etc - so not much spreading really.

I agree that you have limited control over most things, however with pensions, the requirement to buy an annuity is a major drawback.

I know that this requirement has been watered down, but my understanding is that this only applies if I can show pension INCOME of over £20K per annum, so I will need a mighty pot to do that and if annuity rates do fall, the required size of this pot will increase.

After much consideration, pensions are not for me.

[THEPUMA]

that has always been my plan A.

But more than happy to explore other solutions because plan A involves a load of cash sitting around not doing a lot....

The beauty of this is that you are not relying on entrepreneurs' relief so the company funds can be invested in whatever you want, subject to retaining sufficient liquidity to enable you to be paid the optimum annual dividend.

[prozak]

In the right circumstances (not too far from retirement, modest cashflow requirements/high earning spouse), I think there is much to be said for the "Use your company as a quasi-pension" strategy.

Eg, earn £100K pa (say). After adjusting for flat rate VAT, paying a salary and some expenses, you might end up with profit before tax of £90K. Pay CT of £18K and a divi of £32K leaves retained profits of £40K pa. Accumulate this until you retire, say 15 years. You now have £600K in your company.

The obvious thing to do is to pay CGT of £60K and walk away with £540K. The alternative would be to carry on paying dividends to H & W (both now retired, no other income) of £38K each per annum for 8 years.

Or do 12 months working full-time abroad and pay it out as a tax-free divi (you obviously have to go to the right place to avoid local tax so probably only an option for that kind of money if it fits in with your retirement plans anyway).

PUMA

that has always been my plan A.

But more than happy to explore other solutions because plan A involves a load of cash sitting around not doing a lot....

[THEPUMA]

In the right circumstances (not too far from retirement, modest cashflow requirements/high earning spouse), I think there is much to be said for the "Use your company as a quasi-pension" strategy.

Eg, earn £100K pa (say). After adjusting for flat rate VAT, paying a salary and some expenses, you might end up with profit before tax of £90K. Pay CT of £18K and a divi of £32K leaves retained profits of £40K pa. Accumulate this until you retire, say 15 years. You now have £600K in your company.

The obvious thing to do is to pay CGT of £60K and walk away with £540K. The alternative would be to carry on paying dividends to H & W (both now retired, no other income) of £38K each per annum for 8 years.

Or do 12 months working full-time abroad and pay it out as a tax-free divi (you obviously have to go to the right place to avoid local tax so probably only an option for that kind of money if it fits in with your retirement plans anyway).

PUMA

[ASB]

Oh right.

I must look into it then, although my plans about future residence make anything difficult for me.


Am I right in taking a previous comment that the max is 50k per year but can be carried forward?

So if i set up a SIPP now and don't put any money in it for 10 years, I can in theory put 500k into it in year 11 ?

No. The carry forward rules are not that simple. You cannot carry forward from a time at which you are not a scheme member, you can only carry forward unused contributions for a maximum of 3 years. I believe employer contributions cannot be carried forward at all which can further complicate things if an employee and employer both contribute.

http://www.pruadviser.co.uk/content/.../PENS10411.PDF

In terms of the question you posed you could set up a sipp now, make a fairly nominal contribution if needed and then pay in 150k in 3 years. Though it also depends on where you are resident.

[prozak]

SIPPs

Oh right.

I must look into it then, although my plans about future residence make anything difficult for me.


Am I right in taking a previous comment that the max is 50k per year but can be carried forward?

So if i set up a SIPP now and don't put any money in it for 10 years, I can in theory put 500k into it in year 11 ?

[Lewis]

In australia they have self-managed pensions... or as they call it Self Managed Superannuation Funds. It is all regulated but you can basically have your own super fund invest in BTL or whatever you choose.

If they had that here, I'd buy into the pension argument in a big way.

Is there anything similar in the UK?

SIPPs

[prozak]

In australia they have self-managed pensions... or as they call it Self Managed Superannuation Funds. It is all regulated but you can basically have your own super fund invest in BTL or whatever you choose.

If they had that here, I'd buy into the pension argument in a big way.

Is there anything similar in the UK?

[ASB]

I am not convinced over pensions.

The annuity rates have halved over the past decade or so, and with the expected increase in life expectancy and low interest rates, I can only see that the annuity rates will fall further over the next decade.

Pensions and how they are structured are too much out of my control to place my future plans around one. I am saving for my retirement through ISA's and other methods, I recall reading that the overall tax savings are similar. I think it was based on that although pension contributions have tax relief, the income is full taxable, whereas with ISA's the tax situation is reversed, ie the capital has no tax relief but the income and capital gains are tax free.

I have yet to hear an pension man convince me that my argument above is not valid.

One thing that does skew the argument is NI savings. This is significant if your are in a position of having a higher salary. If you are effectively paying pension contributions from dividends then it is neutral.

Your points regarding annuity rates are fair. However it is currently the case that with pensions they are now much more flexible with how the benefits are paid, income draw down etc are all possible now in certain circumstances. Whether a pension is the right answer for anybody simply depends upon their own position and circumstances.

[anothercodemonkey]

I'd second northernladuk. A pension still has very good tax breaks attached to it. However I wouldn't sink all my money into it and I'd pay careful attention to fees/charges and what it is invested in. In terms of my own investing activity I put a fair bit into a pension, an ISA and I overpay my mortgage. You really cannot tell how things are going to pan out. Pensions and shares in general have been in the doldrums for ages but when would you want to invest? When things are cheap!

People complain about having no control over their pension but in reality most of us don't have control over our investments. What happens if a massive waste recycling site is build in the field behind your house? What happens if future governments decide to plug the black hole in their finances by enacting land tax? We've seen it happen to pensions with Brown. It is not inconceivable that Milliband, Cameron or some other future leader might decide to raid the housing store of wealth.

[northernladuk]

I have yet to hear an pension man convince me that my argument above is not valid.

I can't convince you but I was convinced when someone went though the benefits of spreading your savings. Over the last few decades many schemes have started and sold as the golden age of investments and most have changed either for the worse or better. People were investing in their houses as their pensions and look where that is now, endowment mortgages promising early repayments and so on and so on. I agree pensions may have fallen by the wayside in the face of competition from other newer systems. Where will these be in 2 decades? I certainly don't know and plan on spreading my risk. One of these is in a pension so am happy to but an affordable amount in there just in case. Some is in my house with is worth what I bought it for and others in my ISA's which are climbing slowly etc etc.

[Waldorf]

I am not convinced over pensions.

The annuity rates have halved over the past decade or so, and with the expected increase in life expectancy and low interest rates, I can only see that the annuity rates will fall further over the next decade.

Pensions and how they are structured are too much out of my control to place my future plans around one. I am saving for my retirement through ISA's and other methods, I recall reading that the overall tax savings are similar. I think it was based on that although pension contributions have tax relief, the income is full taxable, whereas with ISA's the tax situation is reversed, ie the capital has no tax relief but the income and capital gains are tax free.

I have yet to hear an pension man convince me that my argument above is not valid.

[SGD]

I advise anyone to set up a pension so that in future years you can shovel more than £50k into it.

What you do after you have exhausted that route I am not sure.

[Fred Bloggs]

Wow.

What age is your pension available?

I am assuming the poster is >55 (pensions are available from 55 years) and is taking a tax free lump sum of £21982 to supplement his salary/divis. This plan is now not possible since pension contributions are now capped at £50k per year (but you can carry forward allowance from previous years). In a year or two I shall be doing a similar strategy myself.

[prozak]

I treat myself as IR35-caught, and on a hypothetical 100K post-flat-rate-VAT turnover I would retain 85%.

Breakdown:-
Salary £7,072
Pension Contribution: £87,928
Accountancy (crunch.co.uk): £857
Corporation tax: £829
Dividend: £3,315
Future basic rate tax on 75% of pension: £13,189
Total tax: £14,018.

It helps if you have a paid for house, low outgoings, working wife, and savings from pre-IR35 era. If I continue to work full-time, which I haven't done for much of the last decade, then 2012/2013 is the last tax year I will be able to put more than 50K in the pension, so I may pay more tax in subsequent years. (I have an idea how to get around that, that involves leaving money in a company I don't own, that will pay me salary & pension in later years when working less, but not sure if it's worth the effort.)

Wow.

What age is your pension available?