Contractor turning 40, no pension sorted

gsf600y

Turn 40 in about a week, and after years of burying head in sand, I have to get something finally done on the pension front.

I paid into a pension for a few years, which then failed and got put into the Pension Protection Fund. That's telling me I'm entitled to £1,420 at age of 65 (I'm assume that's per annum rather than some one-off amount?).

Aside from that, it will just be state pension for myself and wife.

So, I'm fairly clueless about what I need to do here.
I'm a contractor, and have enough of a rainy day fund in my one-man company to survive being out of work for a long period.
I know that the company paying into a pension for me is a tax efficient thing to do, so I believe what I need to do is get that set up ASAP, but I don't know what sort of pension I should look into.

As my wife is also an employee at the moment, is a 2nd pension a good idea for her too? Or is ploughing all the money into 1 pension a better idea?

Having had the 1 pension I did have go into the PPF, is there any danger of losing the money you plough into a pension? How garunteed are they?
I find it quite off putting that such a massive investment, for something so important, isn't as reliable as I thought.

Any advice appreciated.

Thanks.

jamesd

Yes, the £1,420 is each year, increasing with CPI inflation in most cases, though not for some older years so it depends just when you were working in that job. The PPF can tell you how much increases with inflation and how much doesn't.

In a personal pension there isn't any protection from the ups and downs of investment values over the years but there is excellent protection from fraud which means you can forget about that issue as long as you stay with UK investments instead of falling for scams that often use foreign property or green investments.

The core part of the plan is the two state pensions. Between them that's about £16,000 a year of income that goes up with inflation. Get forecasts for both of you and make sure that you're both going to get the maximum.

It's good to have the company make pension contributions for both of you. That can be done as an employer contribution without having to pay NI or income tax on the money so it's very tax efficient. In retirement the fairly even split will maximise the benefit of the two income tax personal allowances in reducing income tax then.

It's pretty common for women to have lower pension levels than men so you might consider paying more into pension contributions for her than you for a while. To match the £1,420 you'll get she'd need about 25 times that in a pension pot. Investment growth at a cautious 3% a year for 25 years roughly halves the amount needed to get there today, so you might think of trying to get her £1,420 * 25 / 2 = £17,750 ahead of you in pension pot value as fast as you sensibly can.

MoneySavingUser

gsf600y wrote: »

I have to get something finally done on the pension front.

Yes!

gsf600y wrote: »

I paid into a pension for a few years, which then failed and got put into the Pension Protection Fund. That's telling me I'm entitled to £1,420 at age of 65 (I'm assume that's per annum rather than some one-off amount?).

Probably per year - is it on a statement you have received from them? Does it mention tax-free cash lump sum as well?

So, I'm fairly clueless about what I need to do here.
I'm a contractor, and have enough of a rainy day fund in my one-man company to survive being out of work for a long period.

How much money? Are you the sole shareholder/director?

As you were a member of a pension scheme previously, you can use the 3 previous tax years annual allowances too which I think gives £160k allowances for the current tax year. But you should speak to your accountant to confirm that this will meet the wholly & exclusively test for corporation tax purposes.

I know that the company paying into a pension for me is a tax efficient thing to do, so I believe what I need to do is get that set up ASAP, but I don't know what sort of pension I should look into.

Yes, you will save corporation tax on the amount.

As my wife is also an employee at the moment, is a 2nd pension a good idea for her too? Or is ploughing all the money into 1 pension a better idea?

Is she an employee of your company or another company? If another company, has her employer set up an auto enrolment scheme? Does she have previous pensions?

Two is better as you can both then use your personal allowance in retirement.

Having had the 1 pension I did have go into the PPF, is there any danger of losing the money you plough into a pension? How garunteed are they?
I find it quite off putting that such a massive investment, for something so important, isn't as reliable as I thought.

Your PPF scheme was a defined benefit scheme which is based on final or average salary and the risk usually lies with the employer (with the PPF as a fall back). Now you will get a defined contribution pension which is based on the investment value - your pension can go up and down based on stock market movements.

The assets are however ringfenced by the company running the pension so there is no loss if they were to fail.

gsf600y

MoneySavingUser wrote: »

Yes!
Probably per year - is it on a statement you have received from them? Does it mention tax-free cash lump sum as well?

It's online PPF website, and it talks about "total entitlement".
"The online benefit statement is an estimate of your compensation at your normal pension age(s), ignoring future inflation. It’s based on the information we hold about you."

MoneySavingUser wrote: »

How much money? Are you the sole shareholder/director?

I've got about £30k I could "use", and the rest I'd prefer to keep in the company for being out of work, etc.
Ongoing, I could probably put £2k per month into pensions.
Sole director, me and wife shareholders.

MoneySavingUser wrote: »

Is she an employee of your company or another company? If another company, has her employer set up an auto enrolment scheme? Does she have previous pensions?

Employee of my company only currently, no previous pensions.
Hopefully returning to full time employment in next 12 months though.



Thanks for all the information so far JamesD and Moneysavinguser


Who do I got to, to sort out setting up the pension?

jamesd

It seems as though you might have a pretty big rainy day pot. What does your income tax bill look like? I'm wondering whether some use of VCT investing to both generate ongoing tax exempt income and reduce your income tax bill might be sensible.

VCTs range from pretty predictable to boring ones like Albion to very racy stuff. You get 30% of the amount purchased as a reduction in the income tax bill for the year of purchase. VCT dividends are tax exempt and the Albion VCT expects to pay about 10% on the value after deducting the tax relief while maintaining or increasing the investment value. The 30% has to be repaid if sold within five years so you'd need to be sure that both this and the ups and downs in value didn't compromise the emergency fund use excessively.

You might consider plans like one of these two:

1. Gradually increase the amount purchased each year until the amount purchased covers your tax bill and the sales of those purchased say six years ago are covering the purchase cost. This leaves you with a steady amount invested and producing tax exempt income with nil or greatly reduced tax bill on the day job.

2. Gradually accumulate the VCTs to obtain the ongoing tax free income without a plan to sell after holding for six or more years.

In both cases you'd need to ensure that they weren't an excessive part of your total investment mixture. Particularly an issue with plan 2 because plan 1 naturally caps the amount you have at enough to eliminate six years worth of income tax.

I'm currently three years into a blended 1 and 2 approach: 1 now then 2 later in retirement as part of a plan to have all of my retirement income be free of income tax. A bit of transition time in 1 will be while I move taxable money out of pension pots into ongoing tax free ISAs so it gradually transitions to ongoing tax free income generation.

gsf600y

Haven't got a high tax bill really. Dividends under the higher rate, and salaries low enough to not incur much tax.
Not that much in the company,but enough to see me through a couple of years or 3 if we batten down the spending hatches.

Is the idea around these VCT's that you can use them to gain income at a lower rate of tax? And don't take as much income from other less tax efficient sources?
Trying to find an explaination of how they work.

Makkusu

gsf600y wrote: »

Turn 40 in about a week, and after years of burying head in sand, I have to get something finally done on the pension front.

I paid into a pension for a few years, which then failed and got put into the Pension Protection Fund. That's telling me I'm entitled to £1,420 at age of 65 (I'm assume that's per annum rather than some one-off amount?).

Aside from that, it will just be state pension for myself and wife.

So, I'm fairly clueless about what I need to do here.
I'm a contractor, and have enough of a rainy day fund in my one-man company to survive being out of work for a long period.
I know that the company paying into a pension for me is a tax efficient thing to do, so I believe what I need to do is get that set up ASAP, but I don't know what sort of pension I should look into.

As my wife is also an employee at the moment, is a 2nd pension a good idea for her too? Or is ploughing all the money into 1 pension a better idea?

Having had the 1 pension I did have go into the PPF, is there any danger of losing the money you plough into a pension? How garunteed are they?
I find it quite off putting that such a massive investment, for something so important, isn't as reliable as I thought.

Any advice appreciated.

Thanks.

Hi there,

Have you posed the question to your accountant at all? They should be in a good place to be advising you.

It'd be interesting to know you current dividend/salary levels and what you pay for accountancy fees too.

I'm a contractor accountant myself (work for this years award winning firm) feel free to drop me a PM, who knows, reduced fees could mean an increased pension for you.

In all honesty though, most good accountants get their hands dirty with some form of wealth management for their clients if you simply ask, they'll be able to draw up some good advice for you (I certainly do for my clients).

This forum is great but you there's a lot more elements to planning contribution levels and making sure you utilise tax efficiency both now and in the future when you inevitably close.

P.s VCT's are not viable ideas for you from reading your other posts (in my opinion). Stick to bread and butter, tried and tested, max tax efficiency leftovers into a pension. If your looking to perm in a years time ensure that's planned right also. There is no magic scheme which beats this...

Thanks.

MoneySavingUser

gsf600y wrote: »

Haven't got a high tax bill really. Dividends under the higher rate, and salaries low enough to not incur much tax.
Not that much in the company,but enough to see me through a couple of years or 3 if we batten down the spending hatches.

Is the idea around these VCT's that you can use them to gain income at a lower rate of tax? And don't take as much income from other less tax efficient sources?
Trying to find an explaination of how they work.

If you invest in a VCT you can get 30% of the investment as a deduction from your income tax bill, and the first £200k of dividends per year can be tax-free (if you subscribe for shares rather than buy second hand ones I think). But I think you should probably concentrate on the pension first if you don't know much about investments.

gsf600y wrote: »

It's online PPF website, and it talks about "total entitlement".
"The online benefit statement is an estimate of your compensation at your normal pension age(s), ignoring future inflation. It’s based on the information we hold about you."


I've got about £30k I could "use", and the rest I'd prefer to keep in the company for being out of work, etc.
Ongoing, I could probably put £2k per month into pensions.
Sole director, me and wife shareholders.


Employee of my company only currently, no previous pensions.
Hopefully returning to full time employment in next 12 months though.



Thanks for all the information so far JamesD and Moneysavinguser


Who do I got to, to sort out setting up the pension?

May be worth writing to the PPF and asking for an estimate of benefits which might make it clearer, but on the face of it you just have a yearly pension and no lump sum I think.

If I was you, I'd put the full £30k in now and then put in £2k a month going forward. Make sure the provider knows it is an employer contribution.

You could put some in for your wife if you make her a director, but it might not pass the wholly and exclusively test if she isn't doing much work for the company (ask your accountant).

If she starts a job, she should join the scheme with the new employer and pay in at least enough to get the employer match.

If you want to start a pension, there are a few options:

1) See an IFA and have them set it up.

2) Do it yourself with someone like:

http://www.hl.co.uk/
or
https://www.cavendishonline.co.uk/pensions/
(just two examples, there are lots of companies - have a read around this form for more info)

If you don't have much investing experience try reading this as a starting point: http://monevator.com/category/investing/passive-investing-investing/

jamesd

gsf600y wrote: »

Is the idea around these VCT's that you can use them to gain income at a lower rate of tax? And don't take as much income from other less tax efficient sources?
Trying to find an explaination of how they work.

Buy new issues that are typically offered around November and HMRC either refunds 30% of the amount purchased or doesn't charge you income tax on it. So buy £6666 and that eliminates the basic rate income tax bill on £10k of basic rate income because 30% of 6666 is the same as the 20% income tax bill on the 10k.

Then the dividends are useful extra tax free ongoing income.

The shares are traded on the London stock market. If you buy them there you don't get the initial 30% tax relief but you still get the tax exempt dividends. For most potential buyers it's better not to buy on the stock market.

There is no limit to the total amount you can own, just a £200k a year limit on how much you can buy and get the initial 30% tax relief on. 44% of total annual buys are £10k and below per person so it's not just a rich person's tool.

Makkusu

MoneySavingUser wrote: »

If you invest in a VCT you can get 30% of the investment as a deduction from your income tax bill, and the first £200k of dividends per year can be tax-free (if you subscribe for shares rather than buy second hand ones I think). But I think you should probably concentrate on the pension first if you don't know much about investments.

May be worth writing to the PPF and asking for an estimate of benefits which might make it clearer, but on the face of it you just have a yearly pension and no lump sum I think.

If I was you, I'd put the full £30k in now and then put in £2k a month going forward. Make sure the provider knows it is an employer contribution.

You could put some in for your wife if you make her a director, but it might not pass the wholly and exclusively test if she isn't doing much work for the company (ask your accountant).

If she starts a job, she should join the scheme with the new employer and pay in at least enough to get the employer match.

If you want to start a pension, there are a few options:

1) See an IFA and have them set it up.

2) Do it yourself with someone like:

http://www.hl.co.uk/
or
https://www.cavendishonline.co.uk/pensions/
(just two examples, there are lots of companies - have a read around this form for more info)

If you don't have much investing experience try reading this as a starting point: http://monevator.com/category/investing/passive-investing-investing/

30% tax credit on a VCT would be wasted for a basic rated taxpayer he probably pays at most £2k income tax.

Better off drip feeding profits for minimal tax and when he takes on a perm role lump a pension contribution, carry back losses and utilise the £11k capital gains allowance on closure.

You can also gift shares to a spouse so that shouldnt be a problem with correct paperwork and down to preference whether some goes to the wife or not.

jamesd

Makkusu wrote: »

30% tax credit on a VCT would be wasted for a basic rated taxpayer he probably pays at most £2k income tax.

This basic rate tax payer - me after a high level of pension salary sacrifice - cut £4,500 off their income tax bill by buying VCTs in 2016-17. That's an extra £4,500 in my pocket, not HMRCs, courtesy of buying £15,000 of VCTs. If the income tax bill is £2,000 that takes a £6666 buy to eliminate it, though it's normal to buy only in multiples of £1,000 so maybe just buy £6,000 worth.

Because of past buys and that I'll be getting about £3,000 a year of tax exempt dividends. That'll pay my mortgage and council tax.

Basic rate tax payers aren't any less deserving of tax breaks than anyone else.

A business owner can do things like employer pension contributions and paying profit as dividends as well but the money which is going to be spent after coming out of the business does eventually get taxed when it's high enough.