where do i begin?

ExpedLdr

I am 43 in May, run my own one-man business which has profits of circa £200k/pa. I have a small Armed Forces pension that currently pays me £324/pm but will improve when i am 55; but i doubt will be a liveable pension.

I want to make sound provision for the future so what is the best way of getting money out of the business, pre-tax if possible, to build my pension.

I am not an unintelligent man just a pensions-virgin!:D So where do i begin, what are the must have products and who should i be getting them through?

All advice, thoughts, opinions and jokes gratefully recieved.

thanks

Mike

Footsie_2

Mike to be perfectly honest I would advise seeing an IFA. An IFA will look at your overall financial situation and will have market knowledge on the best products for you. You CAN do it youself, of course, but this is the kind of thing you want to make sure you have had the best possible advice.

shaunrc

Hi Mike

I am an IFA so please do not take this as formal advice as for a regulated pension that has a specific meaning.....

Firstly well done it sounds like your business is going well!

Have you formed a ltd. co' ? This area is where you can make real tax and national insurance savings from a pension.

The other areas where there are gains from having a ltd. co' are

1. life cover
2. critical illness cover
3. sickness cover
4. healthcare

It is an area I look at a lot and what you need to do is find a specialist IFA for this sort of thing as once you sort out what you want then he/she will be able to give you advice also as to what type of pension and also investment advice.

Retired_I.F.A.

Shaunrc may well deal exclusively with simlar situations but I dont see any reason why you'd need to seek out a "specalist" IFA they are no more qualified educated or wiser than any other.

ExpedLdr

Guys thanks for taking the time to help me with this.

You are all absolutely right of course! I need the services of an IFA so i have spoken to my Accountants and they have recommended a Wealth Mngt company, sounds a bit grand particularly as i have never considered myself 'wealthy' but he is going to come and see me.

Thanks again for giving me your time and advice.

Retired_I.F.A.

Mebbe you ought to go see them first.

Posh offices in a posh address with porsches parked round the back often deserves another 'p' and an 'o'

Footsie_2

Some companies just like to posh themselves up with that grand old title, doesn't actually mean anything. Just another business term for the modern day!

dunstonh

The term IFA covers a range of skills and specialisations. Specialisation has been increasing over recent years and qualification levels are on the up (FSA have proposed a mandatory increase from 2009).

There is little point seeing an IFA that spends 95% of their time doing mortgages if you want to talk investments. It maybe fine if you are looking at your £7k ISA allowance but not if you are looking at large portfolio.

shaunrc

Hi Mike

As a test for them I wouldnt if I were you mention the ltd. co gains and would wait and see what he/she says. With the link from your accountant they should be on the ball but I do see a lot of people where it hasnt happened.......

Good Luck!

meester

As a company director, you should pay a salary of not less than the personal allowance. This is £5,255 for this tax year.

At this level you receive an NI 'stamp', without paying any NI.

Beyond this level, you start paying NI.

Higher rate band is £33,300 + your personal allowance. Assuming the £5,225 salary, this means you can pay £33,300/year gross dividend, i.e. £29,970 net dividend.

Anything above this is taxed at 25%.

In terms of pension, all payments into a pension are free of corporation tax and income tax. As a company director in a close company, it is not particularly prudent to pay much income tax, because of the National Insurance payments, which are mostly not recoverable.

The maximum PERSONAL payments are here:

http://www.hmrc.gov.uk/rates/pensions.htm

Tax relief is limited to relief on contributions up to the higher of

• 100% of your UK taxable earnings, and
• £3600.

With a £5,255 salary, you can therefore make a PERSONAL contribution of £4,075.50, and get it grossed up at the basic rate (22% Income Tax) to £5,255.

This is obviously small potatoes at your age, and relative to your current lifestyle and future earnings power, so the question is about the employer contribution.

This can be any amount up to £215,000/year, but is subject to the doctrine of being 'wholly and exclusively for the purpose of the business'.

This is discussed here (et seq)

http://www.hmrc.gov.uk/manuals/bimmanual/bim46030.htm

The guidance is pretty favourable towards directors in close companies, the doctrine effectively being that the total remuneration (salary and pension) must not be excessive (with respect to the tax-relieved pension) relative to a true commercial salary for your job. As it is you that is bring in your company profits, it is in my (unqualified and untrained) opinion that any pension could not be excessive.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM46035.htm

So therefore your company can basically make any amount of payment into your pension, and not pay any tax.

As to the scheme, well I personally pay into, and via my close company, Hargreaves Lansdown's SIPP (http://www.h-l.co.uk/). This is then invested as I choose in a variety of investments. I am only 25, so my payments are just £6k/year. However you are very close to the minimum retirement age. The good news is that you can take out 25% of your total pension pot at 55, as tax-free cash. The remainder has to stay in your fund, where you can leave it invested and go into income drawdown (which is limited to 120% of the the GAD table rate http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm, which given the current 15-year gilt yield of 4.68% (http://markets.ft.com/markets/bonds.asp)) gives a GAD rate of 5.8% for a 55-year-old retiring TODAY, * 120% = 6.96% total).

In other words, whatever you have in your fund at 55 (assumign that is your retirement age), you would currently be able to withdraw a maximum of 6.96% (this is potentially capital withdrawal, depending on your fund performance). Bearing in mind the 25% tax-free lump sum, you might decide you wanted a pension of £40k/year. This would require a fund of £766,000 (also eliciting the £191,000 cash lump sum) - a bit more than a small fortune for such a small income!

Assuming 12 years, and 3% REAL (after inflation) annual growth of your capital, then you can compute an approximate annual payment using a geometric series. It comes to £50k GROSS per annum, rising annually with inflation. That of course is only £30k net, which is a relatively trivial sum to you.

Of course it may well be prudent to make bigger up-front payments, if you have the money floating about, b ecause the longer it's invested the more time it has to grow (though the market seems a bit turbulent just at the moment).

Evidently given your ample income you do have the chance to make suitable provision for your retirement. Your only other option would have been to join the public sector and get a final salary pension at a tiny fraction of the cost. Luckily you have the finances to make proper provision, which most people do not, but you do obviously need to realise that your pension payments must be LARGE - the normal £50/month isn't anywhere close to adequate, £5,000/month is nearer the mark.

Just to add, if you want a safer option you can always buy an annuity, but they don't look very good value to me.

meester

just to add, I don't particularly trust financial professionals as it is my experience that many professionals are not especially competent anyway. I'm sure some are adequate, but I prefer to manage things myself, even if it does cost me money relative to the value of my time. Investing in funds with a good track record across a range of market sectors is not particularly challenging. I am not sure an IFA will necessarily have the knowledge of your specialist situation to advise on the tax issues anyway.

The other question being, where is your accountant????