Hypothetical simple question

Pennysmakepounds

A simple question for someone in the know.


If I have a 100K pension pot at desired retirement - say 55/60.


Took 25K lump – 25%

Then take the max personal allowance 12,500 per year

How long will the funds last?

Albermarle

It depends on how the remaining 75% is invested .
If it is in cash then the calculation is easy _ £75K / £12.5K = 6 years
If it was invested and the investments went up it would maybe max one year longer . If they went down it would be shorter .

Pennysmakepounds

Albermarle wrote: »

It depends on how the remaining 75% is invested .
If it is in cash then the calculation is easy _ £75K / £12.5K = 6 years
If it was invested and the investments went up it would maybe max one year longer . If they went down it would be shorter .

Thank you for responding.


I understand the simple 75/12.5K bit - if its in a saving account.


Was just wondering how things would stack up if it was in a SIPP or a ltd company pension scheme.


I would obviously get the TAX relief on putting the 100K into the pot - so in essence it would be 120K.


If we assume the normal rules of inflation and growth - how does it add up if take the max TAX FREE sum every year.


I'm trying to understand if its beneficial to invest ALL my profit in the business account for the past 7/10 years into the Pension when i close the business down.

Dazed_and_confused

You have misunderstood a few things.

I understand the simple 75/12.5K bit - if its in a saving account.

The explanation was correct for a SIPP. You can have the fund held as cash in a SIPP. If it is invested it will go up or down depending on how well the investments perform. So it might last a year or two or ten. All down to investment performance.

Another option would be take the TFLS as part of each annual withdrawal instead of all upfront.

I would obviously get the TAX relief on putting the 100K into the pot - so in essence it would be 120K.

Your pension fund would never be £120k.

If it wasn't a relief at source scheme it would be £100k.

If it was a relief at source scheme it would be £125k. Unless it was a company/employer contribution where no tax relief is due.

I'm trying to understand if its beneficial to invest ALL my profit in the business account for the past 7/10 years into the Pension when i close the business down.

Who would actually be making the contribution? There are limits which may prevent you putting the whole lot in all in one go. And there is no tax relief added to an employer contribution.

SonOf

Was just wondering how things would stack up if it was in a SIPP or a ltd company pension scheme.

What do you mean by limited company pension scheme? (there is no such product)
Do you mean that a limited company is making employer contributions then that can be to a SIPP, PPP, master trust scheme or stakeholder pension? The type is largely irrelevant though as the maths would be exactly the same (as mentioned higher up).

I would obviously get the TAX relief on putting the 100K into the pot - so in essence it would be 120K.

Not if its a limited company making the contributions. In that scenario, the corporation tax bill is reduced and £100k goes in the pension. The only way £120k goes in the pension is if £120k gross contributions are made.

If we assume the normal rules of inflation and growth - how does it add up if take the max TAX FREE sum every year.

There is no maximum tax-free sum EVERY year. You can either take the 25% up front based on the value at that point. Or you can take 25% of each withdrawal tax free.

e.g. £100k with a reasonable drawdown rate of 3.5% p.a. would be £3500. That would be £875 tax free (As the 25%) with the rest taxable if it falls above your personal allowance.

The draw rate really depends on your objective. If you are planning to draw it out as £12,500 a year then you would be foolish to plan on any other figure than £100k / £12,500. i.e. 8 years. It is too short a timescale to use anything different in your assumptions. Yes, you may get extra months but its rarely wise to assume you will get them on such a short period.

I'm trying to understand if its beneficial to invest ALL my profit in the business account for the past 7/10 years into the Pension when i close the business down.

As the contributions would reduce corporation tax, then generally (but not 100% of the time) you would not pay any more into the pension than the maximum corporation tax benefit. There are also contribution limits on what you can pay in.

Pennysmakepounds

SonOf wrote: »

As the contributions would reduce corporation tax, then generally (but not 100% of the time) you would not pay any more into the pension than the maximum corporation tax benefit. There are also contribution limits on what you can pay in.

Sorry that was my 'Homer' Moment.


That's is what i meant, I could save on the coperation Tax (20%) and Dividends (7.5%).


If i put the money into a Pension scheme rather than take the money from the business as CASH, to save in a ISA or the like for retirement.

MaxiRobriguez

The answer depends on how it's invested within the pension.

Low risk bonds/cash = 6 years at best.

Higher risk equity = Somewhere between 3 years and 10 years, with the most likely scenario being 7-8 years, depending on equity performance during those timeframes, assuming you don't hit a bear market in year one or two, and whether it's all invested or you're retaining a proportion as cash every year.

Pennysmakepounds

I'm thinking of playing is safe and investing a 'Low Risk' investment.


That way I'm still better off from, what i can tell with the TAX savings - if nothing else.


So in theory i could still make 15/20 K in savings this side from TAX.


Rough figures based on 100K would be:

20K Cooperation Tax saving
6K Dividends Savings

So in reality my total pot would be 26K better off- if you count in that fact that if i take the CASH i would ONLY get 74K.

SonOf

I'm thinking of playing is safe and investing a 'Low Risk' investment.

Remember that playing too safe can actually be riskier than taking a sensible level of risk.

That may sound strange but there are multiple types of risk. Investment risk is just one of the risks. The others are inflation risk and shortfall risk. The lower the investment risk you take, the greater inflation risk and shortfall risk become. So, it is finding the balance between all three that you need to do.

cjking

I think OP is just trying to take money out of the company tax-efficiently. Yes I think this is the way to go, just check that you will get corporation tax back on the full amount. If the company is being wound up then the most you can do is reduce current and previous years profits to zero. You don't want to create a loss you can't use.

cjking

I'm trying to understand if its beneficial to invest ALL my profit in the business account for the past 7/10 years into the Pension when i close the business down

Just seen this bit. I'm not an accountant, but as far as I know you will only be able to use a current year expense to reduce current and previous years profit, so you wouldn't be able to get the corporation tax back on most of those years. (It would be different if the company continued to exist, as you could carry the loss forward and set it against future years profit to reduce your tax.)

I think make a contribution big enough to wipe out the corporation tax bill for the last two company tax years, then maybe look at taking the rest as a capital distribution. Look into entrepreneur relief.