Ltd Company Pension Contributions with one eye on retirement

WoB

I'm 50 and currently pay £30k pa into my private pension via my Ltd Company.

The pot is around £300k now and I do have some minimal DB incomes to come in from 60 / 65 etc. We do have ISA etc. also but this isn't particularly the point of this post.

Assuming I only need £15k pa to actually live on and with thoughts about tax efficiency I am wondering at what point do I stop paying into the pension. Forgetting any growth / inflation / other income, that £300k gives me 20 years tax free income.

Currently this pension contribution allows a reduction in corporation tax. Do I continue making this payment into a pension that could grow to a point where the amount in it is subjective to some tax during withdrawal?

This is complicated by the fact I am looking to decrease income into the company by taking more breaks between contracts in the next 5 years. There is an option to not pay pension contributions but roll profits into future years (where I may not work) and withdraw this money via salary/dividends instead. This mean I pay 19% corporation tax on profits as opposed to 20% on income if it was in the pension (and withdrawing this 'extra' above the tax-free amount).

Sorry if the above is a bit muddy. I guess the point is when do you determine you have enough in your pot to stop contributions with consideration to a tax efficient withdrawal of it? Are others just throwing as much into pensions as possible without thinking of the tax implications later?

Maybe there is never an ideal solution but it is just something you need to be comfortable with. At the end of the day most of us don't know how long we'll live or how the quality of life with change etc.

Appreciate your thoughts.

Marcon

£300K might sound a lot (and it is!), but if you live to be a hundred - entirely possible these days - do you really want to spend your last days in penury?

dunstonh

Assuming I only need £15k pa to actually live on and with thoughts about tax efficiency I am wondering at what point do I stop paying into the pension. Forgetting any growth / inflation / other income, that £300k gives me 20 years tax free income.

Why do you think you should stop paying into the pension?

Pensions are no longer a product. They are a tax wrapper. You should use the most appropriate tax wrappers for your situation.

Do I continue making this payment into a pension that could grow to a point where the amount in it is subjective to some tax during withdrawal?

a) you dont have to take out more than you need from the pension.
b) you are only taxed on 75% of what you draw.
c) you have got money out of your company without paying CT and NI.

Are others just throwing as much into pensions as possible without thinking of the tax implications later?

That would be poor financial planning.

This mean I pay 19% corporation tax on profits as opposed to 20% on income if it was in the pension (and withdrawing this 'extra' above the tax-free amount).

19% CT and 7.5% Dividend tax. And its not 20% on the pension as only 75% of it taxed. The other 25% is tax free. So, its 15%.

Maybe there is never an ideal solution but it is just something you need to be comfortable with.

Usually there is. Sometimes there are multiple ways to achieve the same goal but its not often that there is not a solution that is better than the rest.

WoB

Marcon wrote: »

£300K might sound a lot (and it is!), but if you live to be a hundred - entirely possible these days - do you really want to spend your last days in penury?

I agree but what do the 'numbers' type calculation take into account? To never run it down to zero? Appreciate one could use the 4% rule (or whatever percentage is en vogue these days) to never reduce their actual capital and always be confident there is enough there 'forever'.

I am assuming the income requirement will reduce as the ageing process takes hold and we become less able to do things with the money.

westy22

WoB wrote: »

I agree but what do the 'numbers' type calculation take into account? To never run it down to zero? Appreciate one could use the 4% rule (or whatever percentage is en vogue these days) to never reduce their actual capital and always be confident there is enough there 'forever'.

Some people choose to run it down to a £10 tip for their pall-bearers. Others choose to leave a significant sum to their heirs, friends or favourite charity

I am assuming the income requirement will reduce as the ageing process takes hold and we become less able to do things with the money.

Until you get to the point where you can't do anything for yourself and have to pay others to do it for you - i.e. care home or care at home when your need for income rises sharply

WoB

dunstonh wrote: »

Why do you think you should stop paying into the pension?

Pensions are no longer a product. They are a tax wrapper. You should use the most appropriate tax wrappers for your situation.



a) you dont have to take out more than you need from the pension.
b) you are only taxed on 75% of what you draw.
c) you have got money out of your company without paying CT and NI.

19% CT and 7.5% Dividend tax. And its not 20% on the pension as only 75% of it taxed. The other 25% is tax free. So, its 15%.

Thanks dunstonh. The question was more around being tax efficient during withdrawal - your comment 'you have got money out of your company without paying CT and NI' is very true. Maybe it is a bit much to expect to then take some if it out without paying tax!

Re: the 7.5% Dividend tax. I would hope to avoid that on the remainder of the £30k not paid into a pension by rolling that forward to take as salary in future years as the company income reduces/drops to zero.

Your clarification on the pension withdrawal rate actually being 15% shows that continuing to contribute to the pension direct from the company (reducing corporation tax) seems to be the logical option.

Paul_Herring

Maybe it is a bit much to expect to then take some if it out without paying tax!

Given the current year's tax rates, where the TFA is £12,500, and you can have 25% of each withdrawal from the pension tax free, you can basically withdraw £16,666 before you start incurring the marginal rate of 20% on anything above that.

WoB

Paul_Herring wrote: »

Given the current year's tax rates, where the TFA is £12,500, and you can have 25% of each withdrawal from the pension tax free, you can basically withdraw £16,666 before you start incurring the marginal rate of 20% on anything above that.

Yes. This partially influenced one of the points I was making. Given that £15k per year is enough for me to live on it started me thinking about what size pension pot I needed in order for it to last and provide that income. As I mentioned I have few grand of DB kicking in around 60/65 so the income required out of the DC pot reduces a bit, then we have state pension kicking in also.

Assuming I go into drawdown mode and the pot returns 4% etc. going forward. Again, it comes back to how long I'll live for / whether the money runs out or I leave something in there as inheritance etc. Lots to ponder!

ex-pat_scot

Bear in mind also that pension contributions are a legitimate business expense of your ltdco, whereas there's a bitter IR35 wind blowing retrospectively on taking dividends.

You might well find that your current drawings might be deemed inside the scope of IR35, in which case you would be subject to ersNI, eesNI and PAYE. That's 45% straight off the bat, or 65% above £50,000.

In general terms, work out what warchest you want to see you through the next 5 years, and to cover both planned absence and unplanned gaps/ bench time. Anything above this is most tax-efficiently probably in a pension.
After 5 years, then your pension becomes your warchest as you can draw it down on demand.
£300,000 now at 50 is OK but not great. I wouldn't consider slowing down the rate of contribution.
As you near 55, then the risk of having your pension money inaccessible disappears. Max the pension contributions!

WoB

ex-pat_scot wrote: »

Bear in mind also that pension contributions are a legitimate business expense of your ltdco, whereas there's a bitter IR35 wind blowing retrospectively on taking dividends.

You might well find that your current drawings might be deemed inside the scope of IR35, in which case you would be subject to ersNI, eesNI and PAYE. That's 45% straight off the bat, or 65% above £50,000.

In general terms, work out what warchest you want to see you through the next 5 years, and to cover both planned absence and unplanned gaps/ bench time. Anything above this is most tax-efficiently probably in a pension.
After 5 years, then your pension becomes your warchest as you can draw it down on demand.
£300,000 now at 50 is OK but not great. I wouldn't consider slowing down the rate of contribution.
As you near 55, then the risk of having your pension money inaccessible disappears. Max the pension contributions!

Good point on the IR35 / dividend future - appreciate your input, all sensible advice thanks!

lisyloo

WoB wrote: »

I agree but what do the 'numbers' type calculation take into account? To never run it down to zero? Appreciate one could use the 4% rule (or whatever percentage is en vogue these days) to never reduce their actual capital and always be confident there is enough there 'forever'.

I am assuming the income requirement will reduce as the ageing process takes hold and we become less able to do things with the money.

The 4% rule is to be relatively confident you won’t run out of money if you live a long time e.g.into your 90s
It isn’t really possible to calculate using all the capital as none of us know how long we’ve got, so if you don’t want to live in penury at say 95 then you do need to calculate it lasting a very long time.
In practice At this level there isn’t much a line between forever and say 45 years (or however long you want to be confident you’re not in penury).

My personal experience of elderly parents is that costs might go down temporarily (when they stop driving, doing on holiday etc.) but then quite quickly start to go up when they need help with cleaning, any DIY and eventually care. Transport doesn’t necessarily go down when you stop driving depending on where you live. If you need taxis because you can’t get to the bus stop or even a wheelchair taxi then it gets more expensive.
This is all individual of course, so it’s best to do your own figures, but general pot sizes discussed on here are £400k - £1millionfor retirement with £400k being at the more frugal end of the spectrum.