Limited Company Profits into Pension Pot

dunstonh

Most directors would not utilise an auto-enrolment scheme for their personal provision. They would use an individual scheme with employer contributions made to it.

This is a very busy time of the year for many directors (and their advisers) as they look to make their annual pension contribution before their business year end.

I'm wondering how best I get this money from the business into my pension pot and at what cost? Can this only be taken through PAYE, which will then incur a lot of Employers NI, Tax and NI etc? Or can the company pay it direct as a lump sum? (Noob questions I know). I know employer matching the pension is a big thing now but does this help me as the profits are 100% mine?

Employer matching doesnt apply to you. You also do not make personal contributions. The whole point for a shareholding director is getting money out of the company efficiently as possible. The pension contribution paid by the company (as an employer contribution) is a business expense. So, it reduces CT as already mentioned higher up. You also avoids NI as your salary has not been increased to allow you to make a higher pension contribution. Also, vs drawing the money as dividends, it avoids the 7.5% dividend tax (if basic rate) or 32.5% dividend tax (if higher rate).

Be careful to understand and disambiguate the information you seek and receive from an accountant (largely company based) and FA (largely personal based).

Accountants and IFAs tend to work together as they have separate remits. Whilst decades ago, many accountants were able to give pension advice (most were regulated under FIMBRA for those who like to recall blasts from the past), they no longer do and most gave up when FIMBRA ended and the increased requirements for advisers came in. Nowadays, you tend to find IFAs give accountants advice in areas of tax wrappers whilst IFAs use accountants for their areas of expertise. Working together rather than doing the same thing.

It would be interesting to read how people invest to minimise risk.

Why do you want to minimise risk? Risk is inevitable with every option. Reducing risks can be counterproductive and lower your returns and introduce new risks. It is about taking the appropriate risk for the objective.

looknohands

Thanks dunstonh, I guess being quite cautious I would prefer to make a lower percentage return with less risk of losing everything.

My thinking with minimising risk is that I could maybe initially invest 10k in the adventurous portfolio, 10k in a conservative portfolio and 10k on individual prospects I liked myself, not putting all of my eggs in one basket if you like. I may have got the wrong end of this, I've only started researching this morning. The above was worked out from H&L.

This is the sort of thing I thought people would maybe discuss somewhere on MSE? I know previous data isn't much to go on as the future isn't predictable but as a newbie it's good to hear how people do these things.

dunstonh

I guess being quite cautious I would prefer to make a lower percentage return with less risk of losing everything.

Which in turn increases inflation risk and shortfall risk.

Risk is not just about investment risk and investment risk is a sliding scale. If you go too cautious, you are replacing risks that may happen with risks that will happen.

My thinking with minimising risk is that I could maybe initially invest 10k in the adventurous portfolio, 10k in a conservative portfolio and 10k on individual prospects I liked myself, not putting all of my eggs in one basket if you like.

That has probably increased the risk of what you were intending. Also, ignoring the individual "prospects", 10k in adventurous and 10k in conservative would likely fall somewhere in the middle. So, why not investment options within the medium risk?

What are this individual prospects you refer to?

The above was worked out from H&L.

Hopefully, not using their own in-house funds

I know previous data isn't much to go on as the future isn't predictable but as a newbie it's good to hear how people do these things.

Risk profile, objective and capacity for loss. i.e. you have goal you want to achieve. So, you take into account the level of risk you can afford to take as well as the level of risk needed to achieve that goal. You then build a portfolio to a defined structure to meet that acceptable volatility range. It is likely you wont be able to work out your volatility so will have to guess if you have it right. However, what you want to avoid is random selections of individual funds giving you no structure. This will likely result in either higher risk levels being taken and/or lower returns over the long run. Especially if you are fashion investing with individual funds. (fashion investing is picking whatever funds the media are promoting on behalf of their article writers and advertisers at that particular time)

System

If the company has accumulated profits you can pay in more than the annual allowance using carry forward, subject to availability.

If paying in a very big sum out of proportion to one year's profits then you need your accountant to confirm that this payment is nonetheless in the company's interest in order to qualify for corporation tax relief.
One example would be if you did not make contributions during the earlier formative years, but were now catching up as the company established itself.

looknohands

dunstonh please understand my knowledge here is minimal a couple of hours this morning as mentioned earlier, so I don't really understand anything you've written. I have been looking at managed growth portfolios that seem safer for the £20k, I felt the rest would then be taking a gamble on some of the 'fashion investing' you mention with £10k but maybe this is unwise.

Not entirely sure if this is what you mean by a 'goal 'maybe my goal is to have a pension of £15k per year? Investing £30k this year from my profits and aiming to invest between £10k - £30k (or more if business continues to grow) for the next 29 years until I am 61 when I would hope to have roughly around £400k saved.

Is an SIPP right for this goal, you seem to be quite knowledgable.

kidmugsy

TheTracker wrote: »

And When you draw it under pension a good chunk may be at 20%, so the relief isn't as attractive as at first blush.

Not really. The part that appears to pay 20% in reality pays 15% because one quarter of the total will have come out as a tax-free lump sum (at least under current rules).

kidmugsy

looknohands wrote: »

Do you receive the state pension alongside the pot investment, if I retired at 61 with the pot would I then get an additional £6k per year at 68

Currently it's about £8k p.a., and yes you'd get it as long as you'd paid in 35 years of contribution, which you will achieve by paying yourself that modest salary rather than taking out from the company entirely in dividends.

xylophone

https://www.gov.uk/new-state-pension/how-its-calculated

Vectra1

Hi All
Just searching through and jumping on this thread
I’m in a very similar position to the original poster.
I have a pretty simple question- again, I’m not very clued up on what is what, so will be looking to someone for professional advice eventually, but I wanted to enter the conversation with some (little) knowledge.
As i director is the only pension i (my company) can pay into is a sipp? Is this correct? as I haven’t seen anyone mention a stake holder or personal pension....
I would be looking to pay in a sum probably once a year only, and unsure of the amount as it depends on profits.
Any help would be really appriecated,
Thanks

dunstonh

As i director is the only pension i (my company) can pay into is a sipp? Is this correct?

Yes to first question.No to second. SIPPs are still one of the minority options. Albeit growing fast and will be the mainstream individual pension option within no time.

Stakeholders are virtually obsolete now. Very niche at best. Personal pensions dominate the actual types of pension use but are in decline as SIPPs replace them and the life companies pull out or switch their product type to SIPP.

I would be looking to pay in a sum probably once a year only, and unsure of the amount as it depends on profits.

Which is why a lot of directors wait until late in their business year before making the single payment.