Could someone please explain to me... (pension tax & inheritance question)

mummylonglegs

Sorry if I am asking stupid questions but I'd really like some help.
My husband & I are joint directors of a Ltd company that by now has acrued a substantial amount.  We are no longer going to do that work so we are considering

1. Closing the comapany with MVL/Members Voluntary Liquidation so that we can get the money out of the company at 10%.
2. Alternatively we could top up my husband's SIPP.

I unfortunately only have a contracted out State pension because historically I have been against pensions (despite the matching/gov contributions/uplift/tax benefits!) because I objected to not being 'allowed' access to my own money, plus I objected to forced annuities, where your children then can't inherit.  However I have just found out that there are new(ish) 'pension freedoms' which mean that after 55 (57 coming up) you can drawdown as you wish - with the first 25% tax free and the remaining 75% taxed at income levels.  IS THIS TRUE???  Also I have heard (and this is attractive to me) that another advantage is that any monies left in your SIPP when you die are placed outside of your estate when you die (up to lifetime allowance of £1.3m) meaning that your children could inherit your pension and their 'nil rate band' (before the punishing 40% interitance tax) would exclude your pension.  Again is this true?

Anyway, so I'm trying to understand pros & cons of MVL vs SIPP...

MVL - if I understand it right this means we could turn company money into 'our' money losing only 10% (also minus insolvency practitioner fees).  We would then need to reinvest it, and then be subject to CGT, currently 20% but (I think) likely to rise to income tax levels.  Also after we die it forms part of our estate, 40% tax for our kids etc.

SIPP - We wouldn't necessarily 'need' the extra pension because he has a reasonable amount already in there, we are mortgage free, have plentiful savings & ISAs plus I stand to one day inherit a lot (I know, we are super lucky).  Also I am wondering if doing the SIPP route really has such benefits financially - Because of the fact that we own the company, our company paying into his pension pot is basically him paying into his pension pot - ie. we don't have that benefit of our contributions being 'matched' by an employer.  We do however benefit from the pension contribution(s) going into the pension before corporation tax is applied.  But really that seems to be the main financial benefit... or am I missing something????  Also, are investment gains in a SIPP subject to the same taxes as outside a SIPP, eg. CGT on share gains?  And *then* taxed at income levels (after the first 25%) when you want to get it out ????




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Dazed_and_C0nfused

My husband & I are joint directors of a Ltd company that by now has acrued a substantial amount.  

A substantial amount of what?

However I have just found out that there are new(ish) 'pension freedoms' which mean that after 55 (57 coming up) you can drawdown as you wish - with the first 25% tax free and the remaining 75% taxed at income levels. IS THIS TRUE???  

They really aren't all that new.  

If you have the correct product/provider, which if starting from scratch shouldn't be an issue, then yes that is how DC pensions generally work.  

You don't have to take the 25% TFLS upfront, you can take it is part of each payment if you wish.  For example £16,666 is a popular amount to drawdown as £4,166 is the TFLS and £12,500 is taxable.  If you have no other earnings/pension in the same tax year there would then normally be no tax to pay on it.

The taxable income is just the same as any other taxable income and the tax due will depend on your other taxable income in the tax year drawdown.

Alice_Holt

I would suggest engaging the services of a good:
a)  Accountant, and
b) An Independent Financial Adviser.

Start by doing some homework on pensions:
https://www.moneyadviceservice.org.uk/en/categories/pensions-and-retirement
'Pension Freedoms' were introduced in the 2016.

Marcon

mummylonglegs said:

Sorry if I am asking stupid questions but I'd really like some help.
My husband & I are joint directors of a Ltd company that by now has acrued a substantial amount.  


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The questions aren't stupid, but relying on patchwork answers here, from people with very limited information about all your circumstances, isn't the brightest of ideas. Now is the moment to get yourself properly informed professional advice from an accountant and an IFA, respectively. It could save you a great deal of money!

dunstonh

'Pension Freedoms' were introduced in the 2016.

And drawdown itself a couple of decades before that.

gm0

If you don't have pensions then saving into them - even at the non-earnings limit of 2880 each. (Instantly 3600 with a basic rate tax credit) is worthwhile. Anything in there will pass unmolested by IHT to your heirs on current rules.   Great tax wrapper a bit surrounded by snags and complex details.  Overcome your prior distaste.  This is simple and obvious. Unless you opt out because "I don't need it so I won't claim it". Noble.  It's that tax credit return foregone on the way in + another 40% bill on the way out (assuming you would otherwise pay IHT on the money were it not in a pension.  Very noble.

On Ltd and employer pensions.

Generally speaking the employment opportunity to save a pension is now capped at an annual allowance of 40k (It can also be less (clawed back) for high salary earners. 4k for people drawing pensions and zero for pension protection but let's assume you are both 40k.  (Google Annual Allowance)   Let's also assume you both are employed (as well as directors and shareholders of the Ltd).  

I recall that max years look back for variable income is typically a max of 3.  But you should check.  With two of you as contributing employees with lowish pensionable pay on the old salary + dividends model for spouse directors with a ltd.  = 2 x 3 x 40k = 240k opportunity space to push retained profits into a savings vehicle with no CGT and no IHT.  Your company didn't have a pension scheme.  But now it does.  Generous employer contributions.  Some salary based employee ones. Some CT reduction on current year profits from the bump to cost base. And some personal tax credit on the employee salary bit - likely at 20% but this based on how you pay yourselves.  Can't make employee contributions on salary you haven't taken.  And dividends are not pensionable.  There may be some accounting timing games to be had - or not.  Need professional opinion on that.  No idea.  I didn't do it in the end when I found my own personal tax gotcha.

If only one of you is (in the HMRC sense) an employed and genuine contributor to the business i.e. the other is just a shareholder non-employed director - then the opportunity is strictly only 120k - 1 x 3 x 40k but these particular rules are viewed as elastic by some.  There is a fair amount of fairly notional employment about.  Your ethics. Your Ltd. Your tax inquiry.  Run the company another year.  Add another 40k. per employed person etc. And so on.

I hope this gives you rough relative magnitude as whether it is worth pursuing.  It is not definitive to your situation.  It's what the pension can likely accept within normal annual limits and an optimistic take on lookback for regular pension saving.  There may be some special closedown edge case rules a professional advisor could point you to which I never learned once I realised I couldn't sensibly do it in my situation.

If you were or later will be doing forestry / renewable energy or farming with land assets that aren't a house you live in  - then a SSAS might be the handy little pension trust for you.  Stick assets in it for a group including heirs. Can borrow 50% against assets to buy more. Pay market rent into the SSAS wrapper) while still enjoying/trading on the assets.  More IHT estate vanishes via rent into the pension bit.  You need a big chunk of change in a range of pockets for the running costs of this sort of thing to make sense. That one is well over my pay grade. 

 
Whether all this is relevant to the size of the retained profits.  We don't know. 
Whether this is worth the complexity (to you) to IHT wrap as much or as little as 240k.  We don't know. 
Whether you can do better with the MVL 10% and then get it into ISAs as fast as you can (40k pa) plus any lucky family members (PET) and live 7 years. We don't know.

If it's a huge amount of retained profits then family trusts and other periodic trust structures and other tax planning investments VCT/EIS can start to become relevant.

You need an IFA with a small business client base who has done a few of these who knows how to knit this sort of thing for your size and shape and when it should come out of the company be it trading or investment shell.

Albermarle

Also you can update your knowledge on pensions here
Pensions: Everything you need to know for retirement (moneysavingexpert.com)
The Pensions Advisory Service

zagfles

Alice_Holt said:

I would suggest engaging the services of a good:
a)  Accountant, and
b) An Independent Financial Adviser.

Start by doing some homework on pensions:
https://www.moneyadviceservice.org.uk/en/categories/pensions-and-retirement
'Pension Freedoms' were introduced in the 2016.

Also check here in case the IFA has a string of decisions against them (as I found when researching an IFA for a relative):

https://www.financial-ombudsman.org.uk/decisions-case-studies/ombudsman-decisions

squirrelpie

"Alternatively we could top up my husband's SIPP."

If you are both directors of the company and if your husband has better pension provision than you at the moment, then it may be worth considering opening a SIPP for yourself and for the company to top that up instead. It's usually better to have more equal provision between partners.