Starting a pension in Ltd company

garybarlowsbeard · 13 September 2017 at 4:18PM

Dunston H - thanks for the reply in the other thread. I'll stick to this now so as not to confuse matters.

So the things I would need to choose are the type of pension, the provider and the funds (the latter depending on the first point and what is offered by the provider).

At the moment I have some funds in an ISA in Vanguard LifeStrategy 100% Equity. My understanding of this is that this is a fairly well-balanced and diverse fund that is good for long-term investment with a degree of risk.

As things stand, that is what I would want the pension to be in. I'm aware that Blackrock and a range of firms offer something similar.

Does that seem reasonable?

dunstonh · 13 September 2017 at 4:26PM

At the moment I have some funds in an ISA in Vanguard LifeStrategy 100% Equity. My understanding of this is that this is a fairly well-balanced and diverse fund that is good for long-term investment with a degree of risk.

I wouldnt say a degree of risk. It is very high risk. About 2-3 times the loss potential of the typical UK consumer.

As things stand, that is what I would want the pension to be in.

A global tracking inc UK would likely be a better option than that fund.

garybarlowsbeard · 13 September 2017 at 4:31PM

But given I intend to keep the money in that for 25 years and it's only about 10% of my ISA high risk equates to a degree of risk overall?

But OK, that would be too risk for my pension, even if waiting 30 years?

At this stage, where I'm investing relatively little into the pension and effectively just want to get started, would any stakeholder pension (I just try and find one that offers the sort of fund you said) with the lowest fees do the job? Then, as and when I can incraase contributions it might be worth spending more time (and money) looking into it.

Thanks again.

dunstonh · 13 September 2017 at 4:42PM

Risk is diluted by time but there is still behaviour risk. For example, you get your fund to £100k. Next statement comes in and its dropped to £50k (two events in the last 20 years would have seen that level of drop). Can you handle that level of loss.

Now lets make that figure £200k. Your statement now shows £100k. Still no issues about it going down £100k?

Risks exist and the risk events will likely happen sooner or later. Risk is not just about the event but how you behave with that event and when you hear on the news that there is global meltdown and everyone is losing money and its another armageddon (a bit like a typical Daily Express headline). Risk is also about can you afford to take risks. Lets say there is a Japan style event where markets drop but dont recover for over 20-30 years? Can you afford to risk you are taking.

So, yes, the more risk you take, the better the returns will "expected" to be and time does help but its one thing saying you accept it and another actually accepting it when you see the balance drop.

garybarlowsbeard · 13 September 2017 at 4:51PM

Yup, fair point. I'm a gambler though, don't have huge financial needs and have a wife with a decent pension!

I hadn't thought about/am not aware of the Japanese situation. But I guess even then unless such a prolonged downturn was global I'd be protected with only limited exposure to each geographic area.

I know things can go bad though. I find it amusing that friends are marveling at how their pensions and investment are doing right now as if it's down to them. I'm feeling quite smug myself but yes, I know that the value of my ISA and subsequently pension could drop markedly in the next 6 months, year or 2 years.

I feel that at this age maybe starting very high risk is wise though? And then perhaps lowering the level of risk every year (I don't know, every 2 years, 5 years?). I'm aware that within 5 or maybe even 10 years of retirement it's common to change the shape of the portfolio dramatically.

But aside from the risk issue, how about a stakeholder pension?

Alexland · 13 September 2017 at 9:19PM

For low regular amounts the Aviva stakeholder via Cavendish is a very good option. The 0.55pc fee (reducing with size) covers both their platform and default fund costs and unlike DIY platforms there is no need to maintain a cash balance to pay custody or trading fees.

Have a look at the PDF application form on the Cavendish website and you can see how your company can make contributions.

Their default lifestyle strategy will automatically reduce the risk as your target retirement age approaches. By default they will lifestyle target an annuity situation (where you would want to withdraw everything at retirement) but you can tell them you anticipate going into drawdown (where you could still take some risk even beyond your retirement).

https://www.cavendishonline.co.uk/pensions/stakeholder-and-personal-pensions/aviva/

https://www.aviva.co.uk/stakeholder-pension/

Also worth playing with the Vanguard Asset Mixer and you will see that over most multi year time periods a portfolio with 20pc to 30pc cash or bonds will outperform a 100pc equity allocation due to the benefits of rebalancing. So taking max risk might generate less than max return.

https://www.vanguardinvestor.co.uk/investing-explained/tools/asset-mixer

Vanguard are launching a SIPP at the end of 2018 which if it is priced as low as their ISA would only be 0.37pc inc VLS (and unlike DIY platforms they are not fussy in requiring a cash balance or charging trading fees) but frankly it's not worth waiting to start investing in your pension and Ryan who runs Vanguard UK wouldn't be drawn into revealing their SIPP pricing before launch. Generally pensions cost at least as much as ISAs from the same provider and often more.

garybarlowsbeard · 14 September 2017 at 8:50AM

Great, that's pretty much just what I'm after (in terms of being told what to do!)

At this stage it's a relatively small investment so happy just to get started with something that at the very least isn't totally inappropriate. As it happens I'm pretty sure the product you recommend is what my business partner already has so that keeps things neat.

Cheers.

garybarlowsbeard · 14 September 2017 at 10:48AM

A while ago I was advised the following in terms of the best way to fund it. Is this still true/accurate (I expect some of the exact figures may have changed but it's the theory I'm questioning)?

Assume that you want £1,000 in your pensions

You would need to pay yourselves an increased amount of money either
as an additional dividend, salary or direct form the company

Salary option

Salary of £1,176

Employer NI at 13.8% =£162

Employee NI at 12% = £141

Employee tax at 20% = £235

Net pay = £800

Paid into pension with additional tax reclaim added by pension
provider = £1,000

TOTAL COST TO COMPANY = £1,338

Dividend option

Use Profits to pay addition £800 dividend

Profits subject to corporation tax at 20%

Amount received by you =£800

Paid into pension with additional tax reclaim added by pension
provider = £1,000

TOTAL COST £1,000

Direct payment by company

£1,000 paid into your pension as a business expense

Reduces taxable profit by £1,000

Saving corporation tax of 20% = £200

COST TO THE COMPANY IS £800

dunstonh · 14 September 2017 at 11:46AM

Company directors should nearly always pay the contribution as an employers contribution. It is the most tax efficient way and it also avoids any issues with annual allowance (shareholding directors/controlling directors can go to £40k a year without a second look from HMRC). You cannot do that with personal contributions as you wont have the income.

cjking · 18 September 2017 at 6:15PM

Don't make regular monthly payments, for a company director an annual single payment of an employer contribution into each person's scheme of an amount decided at the time is likely to be the simplest, cheapest and most flexible way to do things. If you want to make payments more often, then single payments made quarterly is the next best option.

Not sure if my info is out of date, but historically there is a difference between "single payments" and "regular payments" from the pension provider point of view, and "regular payments" are more admin and sometimes result in higher charges. (There used to be and may still be regulatory requirements associated with "regular payments" that don't apply to single payments, for example pension provider had to report you to HMRC if "regular payment" was not as expected. Does not apply to single payment, obviously, as there is no expectation.)

Some of my info regard costs and regulation of regular payments is from a long time ago and in the case of costs specific to companies I was dealing with, so take this as me flagging potential issues rather than gospel truth.

Starting a pension in Ltd company

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