Should I be using a pension?

TanDiy

My sister is a director and shareholder in a very small company (there is one other shareholder/Director). Over the past couple of years the directors have paid a 12K salary and taken the rest in dividends which has always been within the standard tax band. This year she will take 12K salary, 33K dividends and predicts that there will around another 8K available for her to take. The accountant said that, if she takes the extra 8K as a dividend, she would lose 2.6K in higher rate tax. He said she should open a pension and make a company payment of the full 8K. She is very anti pensions but can see the logic in this. The accountant suggested a basic private pension and said that Aviva are always highly rated with relatively low fees. Her question is, is it really worth opening a pension for this small amount or should she just pay the extra tax and have no hassle (her view!) ? It is difficult to predict profits and she may or may not have more money to pay into the pension in the future.

The accountant actually suggested she should seriously consider putting a lot more in to the pension rather than taking a dividend as she would not have to pay corporation tax so could pay in more. Unfortunately, she does not trust pensions, in particular what the Government might change over the years. She is currently 51 years old.

Welcome any views, also we wondered what sort of average yearly return you can expect from a basic pension like Aviva, etc.

Thank you

stoozie1

I think she is so close to being 55 that politixal risk is less of a factor for her.

A 25% gain on the money and being able to get at it in 3-4 years should she need to sounds amazing to me. Especially as otherwise she'd lose so much of it to taxation.

dunstonh

This year she will take 12K salary, 33K dividends

Thats an unusual figure. Directors usually take £8160 plus dividends (for this tax year) to avoid paying NI.

She is very anti pensions but can see the logic in this.

Why is she anti-pension? It is only a tax wrapper after all.

The accountant suggested a basic private pension and said that Aviva are always highly rated with relatively low fees

Highly rated by whom?

Her question is, is it really worth opening a pension for this small amount or should she just pay the extra tax and have no hassle (her view!) ?

She could also pay more into a pension and take advantage of the tax position of them.

Unfortunately, she does not trust pensions, in particular what the Government might change over the years.

Absolutely right. After all it has only been 47 years since the introduction of personal schemes. So, not really long enough. She should wait another 47 years.

The changes in 1988, 2001, 2006 and 2015 have only improved flexibility. The only real negatives have been reducing the amount people can pay into pensions each year.

also we wondered what sort of average yearly return you can expect from a basic pension like Aviva,

Aviva platform is whole of market and has around 30,000 investments available as it is a whole of market platform.

Before she picks provider, she should find out what a pension is and how it works. Rather than have this silly distrust that is almost certainly totally misplaced and likely down to poor understanding.

ISAs and pensions share the same investment options (pensions actually have a bit more choice). So, she must mistrust ISAs and unwrapped investments as well. Is there anything she does trust?

LHW99

stoozie1 wrote: »

I think she is so close to being 55 that politixal risk is less of a factor for her.

A 25% gain on the money and being able to get at it in 3-4 years should she need to sounds amazing to me. Especially as otherwise she'd lose so much of it to taxation.

If it is a company contribution into the pension then I don't think she would personally get any tax relief, but the company would be able to reduce its corporation tax. Someone else would be able to confirm.

Prism

LHW99 wrote: »

If it is a company contribution into the pension then I don't think she would personally get any tax relief, but the company would be able to reduce its corporation tax. Someone else would be able to confirm.

Yup, You don't get tax relief but do save on NI and corporation tax which is even better.

atush

She is very anti pensions

Why? No logic to this, does she use S&S isas?

She should open a pension, have her company pay into it direct for her.

TanDiy

Before she picks provider, she should find out what a pension is and how it works. Rather than have this silly distrust that is almost certainly totally misplaced and likely down to poor understanding.

ISAs and pensions share the same investment options (pensions actually have a bit more choice). So, she must mistrust ISAs and unwrapped investments as well. Is there anything she does trust?

Hi dunstonh,

Thanks for coming back. I thought I would respond direct rather than via my sis. She thinks I am mad to pay extra tax to keep control of my money and I think she was expecting "she is mad for not using a pension" or "don't touch a pension" answers!! I would really appreciate any further information that might put rest to my silly distrust and poor understanding (and indeed I may be missing something). I should also add that I am very happy with current investments in property and S&S ISAs.

This is my current understanding of pensions: Put money in and get tax relief (but this could stop or be changed at any time). No access whatsoever to the money until 55 (or any other age they may decide to change it to mid investment). 25% tax free lump sum upon taking the money (but this could stop or be changed at any time). Let the company make payments to save Corp tax and employers NI (but this could be stopped, changed or questioned at any time). Options at retirement include take the whole pot but you will be taxed after first 25%, take 25% tax free and hope you get something back from annuity before dying, switch to draw down (complicated products, more charges, independent advice) and pay tax each time you withdraw on 75% of the amount, and combinations off (but this can all change). Before you decide how to access the pot you must employ the services of an IFA at your expense. You can invest 40K a year but again this could change or you could be limited by age to allow the younger people to gain greater benefit or any other scheme the government decide to introduce. Total gamble in my view but please prove me wrong. I accept the inheritance tax advantage is good.

S&S ISA: Pay the tax/NI so now you have total control over your money. Take all or part of the pot whenever required with no tax to pay (my view is that there is far less chance of them removing the tax free status of ISA's than there is of ongoing meddling with pensions). Switch to an alternative investment at any time (e.g. withdraw and invest in property, gold, wind, etc)

I want to like pensions but I am really struggling, Thanks for your interest

crv1963

Hi TanDiY


I too was a bit (very) confused by it all. ISA, LISA, H2BISA, Pensions, SIPP and auto enrolment! I read around and asked questions, I then explained it to my wife as follows, and am more than willing to be corrected if I've got it wrong:-


ISA (all versions) limit 20k pa saving in total from taxed earnings or savings from other accounts. Upside what you have is yours to spend tax free on withdrawal, we're too old for LISA and H2BISA in our case so within reason you can get ready access to the funds. Earnings/ growth tax free. Downside no taxman contributions, no employer contributions and possible change of government policy in the future, but they can't take away what you have saved.


Pensions- same products/ funds as ISAs different wrapper. Limit 40k pa or earnings ceiling- not an issue for us. Upside Money goes in untaxed or simply for every £100 we save it costs us £80. Employer can contribute (tax free) and earnings/ growth is tax free. 25% of the total funds can be taken tax free when we decide to draw on it. Any funds left (who knows) can be passed on IHT free to the next generation. Downside we may pay tax on the income taken from the pension fund if we aren't careful enough when we draw it. It is locked away until we're 55 soon to be 57/58 but again not an issue for us. Of course possible change of government policy in the future, but they can't take away what you have saved.


So for us pension saving is a no brainer because of the tax man contributions, as long as we have some rainy day savings and expenditure doesn't exceed income.


Basically ISA and pension funds are the same thing but with different rules on taxing it on the way in and way out. If you think the pension is underperforming you can move funds, the only time you need an IFA is if you want to move a Defined Benefit or final salary fund into a Defined Contribution Fund. SIPPs and the funds being discussed here are Defined Contribution ones, ie you define how much the contribution is and the tax man tops this up in your fund, for us giving our retirement savings a 20% boost really is good value and it may change in the future but they can't take away what you have saved.



All financial products are subject to political changes of policy but we all have to work within the rules as they are today or miss the boat so to speak. The only given is that without additional savings in one form or another the SP is hard to exist let alone live on.

Sorry if the above sounds patronising but it's the simple way to explain it in my opinion.

dunstonh

This is my current understanding of pensions: Put money in and get tax relief (but this could stop or be changed at any time)

Tax relief and salary sacrifice are likely to be looked at in the future. However, a hypothetical reduction has no impact on money paid in during earlier years. Also, this transaction would not get tax relief. Company contributions are paid gross. However, it is a business expense.

No access whatsoever to the money until 55 (or any other age they may decide to change it to mid investment).

The point of a pension is to provide in your later years. The objective, is to match the earliest vesting age to be 10 years under the state pension age. However, that has yet to be enacted in law.

25% tax free lump sum upon taking the money (but this could stop or be changed at any time).

Highly unlikely that will change as it benefits the economy and creates no loss of tax. Pension changes since 1970 have actually increased the
amount available (such as SERPS which never used to get it but now does and allowing it earlier at 55 rather than 60 on retirement annuity contracts).

Let the company make payments to save Corp tax and employers NI (but this could be stopped, changed or questioned at any time).

You shouldnt be paying NI at all. Your account should have you getting £8160 salary a year with the rest dividends.

Options at retirement include take the whole pot but you will be taxed after first 25%, take 25% tax free and hope you get something back from annuity before dying, switch to draw down (complicated products, more charges, independent advice) and pay tax each time you withdraw on 75% of the amount, and combinations off (but this can all change).

You dont have to buy an annuity. However, they still exist and got improved death benefits with the 2015 pension freedoms. Drawdown is not a complicated product. Indeed, for someone taking out a pension now, it is probably the pension that would provide the income in drawdown. Charges are usually the same or little difference. Advice is not required but is available to those that want it. Just as you pay to use an accountant.

Tax is only paid on income above your personal allowance.

Before you decide how to access the pot you must employ the services of an IFA at your expense.

No you dont. That is a choice.

You can invest 40K a year but again this could change or you could be limited by age to allow the younger people to gain greater benefit or any other scheme the government decide to introduce.

It is an annual allowance and has no impact on contributions already made.

S&S ISA: Pay the tax/NI so now you have total control over your money. Take all or part of the pot whenever required with no tax to pay (my view is that there is far less chance of them removing the tax free status of ISA's than there is of ongoing meddling with pensions). Switch to an alternative investment at any time (e.g. withdraw and invest in property, gold, wind, etc)

property, gold and wind? You are worried about a tax wrapper that has been around 47 years but quite happy to consider speculative high-risk options like those? (ok property is not but if you are considering things like that as having lower risk than a pension wrapper, then you are wrong).

Pensions and ISAs share the same investments and can be moved around as you like.

Bottom line is that if the same amount goes into a pension and an ISA, then the pension will provide the greater amount even if the whole of the 75% is taxed at basic rate.

TanDiy

Hi dunstonh,

Thank you very much indeed for taking the time to come back with this information - it is much appreciated and is making me think more about my possible short sited view of things.The 12K salary is a sore point! My fellow director/shareholder wants a 12k salary as they are worried that they would not get any pay if the company failed to make a profit. We do actually have 2 classes of shares but again my partner is frightened that we will have HMRC on our back if we pay a different dividend to each shareholder (I thought this was the idea of different class shares but I guess I would find it hard to answer the question as to why I would take more dividends than the other shareholder). This is really annoying because, as you have picked up, I am paying unnecessary tax and ni. In fact, it is only recently that i have persuaded them to reduce the salaries from 30K (yes I know do not say anything!!!) to 12K. I need to give this all some serious thought. Maybe I should in fact be making company contributions to a pension with the extra corp tax saving, etc.I do actually have an old Royal London pension (with profits type) but they will not accept any further payments to this so I would need to start a new product. I did start to look at products with ready made investment options (accountant suggested Aviva) and then a friend suggested I should look at a SIPP and then it all started to sound too complicated again!!

Thank you again for your help. I think the interest and information you have provided may well change my future ideas. Really appreciated.

dunstonh

I did start to look at products with ready made investment options (accountant suggested Aviva) and then a friend suggested I should look at a SIPP and then it all started to sound too complicated again!!

Aviva have three pension products. Stakeholder, personal pensions and SIPP (platform based).

Stakeholders are a simple product. No bells and whistles. A bit old fashioned by todays standards. SIPPs are the advanced option for experienced investors. More complicated but in reality, no more than a stocks & shares ISA. Personal pensions are mainly retailed via advisers. Typically they are the middle ground option but the DIY market rarely offers them.