So many choices, what to do?

With the changes announced in the budget in March (2014) suddenly pension planning has hit the headlines.  When you have your own limited company there are many alternatives available for pension planning.

The options are:

  • Do nothing
  • Do nothing formal, just invest privately
  • Rely on your home for equity release or downsizing
  • Rely on the state pension
  • Leave as much money as possible in your company and invest it
  • Set up a self-invested pension plan (SIPP)
  • Set-up a personal pension plan;
  • Set-up a company scheme (auto-enrolment)

The do nothing option

There is no reason to retire at all.  If you love your work and you continue to find clients you can continue to work and live as you always have.  This is not an approach the Government would encourage you to take but it is an option.

Invest privately

You can invest any surplus money you have in ISA and the interest and dividends will accumulate tax-free.  The limit for 2014-15 is £15,000 (£4000 for a child).  It is also tax-free to take funds out of an ISA.  Until the recent changes in pensions this was a very attractive alternative to locking your money away in a pension fund.

The income from any funds invested outside of an ISA is taxable and must be declared on your self-assessment tax return.

Equity release or downsizing your home

With property prices rising faster than inflation many people may rely on their property for income in their old age.  Either the property can be re-mortgaged (equity release) to provide a cash lump sum that you can invest or by selling your home and buying something smaller and, again, investing the cash lump sum.

This can be very effective as any gain on your house will be tax-free under principal private residence relief providing you have lived in the house the whole time you have owned it.  This can still be effective even if you have moved out and now rent the property as you will be entitled to principal private residence relief while you lived in the property and letting relief for the part or all of the gain while you let the property.

As a downside, you are rather putting all your “eggs in one basket” and assuming residential housing will always be a good investment.

Rely on the state pension

The Government have introduced a flat state pension.  It is currently £113.10 per week.  In order to qualify for the full amount individuals must have 35 years of qualifying contributions.  A year is a qualifying year if you were paid a salary above the national insurance lower earnings limit, currently £5,772 (2014-15).  All single person limited companies should be paying their directors a salary of at least this amount.

The state pension is not overly generous so you should make other provisions.

Leave as much money in your company as possible and invest it

This is similar to investing privately although in this situation you do not have to take the investment funds out of your company before investing.  Almost all companies set up in the UK with standard Memorandum and Articles and undertake any business activity (providing it is legal).

You may need to check out the criteria for Entreprenuers relief if you plan to liquidate your company and receive a lump sum taxable at 10% only.  If the investment activities become large compared to your company’s trading activities then you may jeopardize this relief.

The other options are covered in part two

If you would like specific help and advice in selecting an appropriate approach to pension planning you should see an Independent Financial Adviser who can provide bespoke advice. Clearways Accountants can only provide generic advice.