You’re not alone its estimated that 1.3 million business owner have no private pension that’s approx one in two UK Business Owners (according to Prudential).
Nearly one in three business owners (or 792,000 people) say they will be entirely reliant on the State Pension when they come to retire, compared with twice as many people across all employment types retiring this year in the UK.
Other self-employed workers will supplement their retirement incomes with money from a mix of alternative sources:
- half will draw on other savings and investments
- one in four will use equity from their properties or plan to use their partners’ pensions, and
- one in five plan to use funds from the eventual sale of their businesses.
Most of us know we should be saving more for retirement and the government knows that we need to save more too. That’s why they give pensions tax breaks and employers are being forced to auto enrole staff into pension schemes and make payments.
But how many of us stand a chance of saving £400k into our pensions? it’s a huge amount of money and yet it only buys a modest pension. Work out your strategy now before its too late.
‘Worrying’ numbers of people are not using their pension savings efficiently leaving potential inheritors liable to a hefty tax, according to Skandia.
Adrian Walker, Skandia’s pension expert said: “The number of people currently in drawdown and not taking an income highlights just how many people could benefit from further financial planning.”
Skandia data shows 59% of customers in capped drawdown are not taking an income. In these cases customers have taken the maximum tax-free lump sum and have left the rest of their fund invested.
The remaining pension fund is technically in ‘drawdown’, even though the customer is not taking an income. This means the remaining pension fund is subject to a 55% tax charge if paid as a lump sum to a beneficiary on the member’s death.
For those who die below age 75, this tax charge was increased from 35% to 55% in April 2011. Skandia has said many people will be unaware of this.
So what action do you need to take to stop this happening once you have retired:
If you are under 75:
- Phase the amount you move into drawdown, many SIPP’s are structured with this in mind and you can use the tax free cash to help with immediate income needs
- Consider reinvesting income in drawdown back into the pension to get tax relief, this reinvestment will not be deemed to be in drawdown
- If you receive £20000 or more guaranteed pension per year, you qualify for flexible drawdown which helps you move money out of the 55% tax charge faster than capped drawdowns
If you are over 75:
- Work with your advisor to access as much of your pension as possible and move it out of the 55% tax charge
Most employees pay 20% tax, 12% Ees NI and their employer pays 13.8% NI, so thats a total tax of 45.8% on employment income.
There are a range of tax and NI free benefits, for example childcare vouchers, where £55 per week can be paid by the employer, so lets use that as an example, using the calculator
An employee earning £30k a year gets
| Wage Summary
|Tax free Allowances
Total Tax and NI = £10401.70
If they use Salary Sacrifice for £55 x52 = £2860, new salary would be £27140
| Wage Summary
|Tax free Allowances
Total Tax and NI = £9091.82
A saving of £1309.98 (45.8% of £2860)
For saves on this scale should you be looking at Salary Sacrifice schemes for your employees,I have seen schemes where it can be applied to a wide variety of things from Pensions to Cars