Pension for Ltd Co Director

[cidersurfer]

The other half has not paid into a pension for approx three years, she's 45 and needs to get this going again so we've been reading around...

She now has her own business which is a Ltd Co and she is a Director. It would appear that she can open a personal pension and the Ltd Co can contribute directly into it making it a tax efficient way for her to save for retirement. I wanted to check with the PH knowledge bank whether this is a good idea and if so, what should it look like? For example, does she open the pension or is it the company? Is it a SIPP or something else?

The funding would probably be via a small monthly contribution plus lump sums directly from the Ltd Co bank account into the pension provider. I'm aware that there are funding limits and HMRC rules etc but only as a layman.

All help and advice gratefully received.

[Jockman]

Yup you’ve covered most areas. She could open a SIPP and the company will make Employer contributions and receive Corp tax relief on them.

[EddieSteadyGo]

Depends somewhat on the level of contributions and the total value of the pot as to whether it is best to just start a normal personal pension plan with someone like Scottish Widows or open a SIPP.

You tend to find if you use a low cost, basic SIPP provider the percentage fees are lower than a normal personal pension. But the fixed costs are a bit higher. But it does vary by provider.

So don't take these figures as gospel but as a starting point, when the total pot is below around £150k I would probably go for a normal personal pension plan. When you get to levels above this a basic SIPP is probably more cost efficient.

Hard to generalise though as costs do vary significantly depending upon the type of funds you want to invest in and the fees of the provider.

[98elise]

Paying into a pension is generally more efficient as a company contribution. If she hasn't paid anything in the last 3 years then she can use carry forward rules to use those allowances as well (120k). That's after she has used this years allowance though (40k).

I'm not an expert though, just someone in a similar situation doing some serious pension savings.

[LivingTheDream]

98elise said:

Paying into a pension is generally more efficient as a company contribution. If she hasn't paid anything in the last 3 years then she can use carry forward rules to use those allowances as well (120k). That's after she has used this years allowance though (40k).

I'm not an expert though, just someone in a similar situation doing some serious pension savings.

secondary question on this (if the OP doesn't mind) - is the £40k allowance £32k plus £8k tax relief added or is it £40k plus tax relief?

[trickywoo]

If it’s through a company the £40k is essentially treated as an expense and assuming there is sufficient profit it’ll save the corporation tax.

[Jockman]

98elise said:

Paying into a pension is generally more efficient as a company contribution. If she hasn't paid anything in the last 3 years then she can use carry forward rules to use those allowances as well (120k). That's after she has used this years allowance though (40k).

I'm not an expert though, just someone in a similar situation doing some serious pension savings.

Indeed, though this becomes more complicated these days with the tapering above £150k, a figure which includes employer contributions IIRC.

[Welshbeef]

One minor thing - on those 3 years did she pay NI and get qualifying years for state pension? If not you can pay in for up to 6 years historically - or simply ensure you have 35 qualifying years (as it currently stands) worth doing as ensuing a full state pension ticks off another component for retirement income.



Currently full state pension is £8,750pa not insignificant and a nice safety net.

[JulianPH]

You have had some excellent feedback so far, just to cover things:

If she has had a pension (contributed to or not) for the last three years she is entitled to make full contributions for those last three years.

The company can do this for her as a business expense (so pay the money gross and offset it against tax).

If she has not had a pension for any of these years then she cannot make backdated payments either herself or via her business for those years.

Company contributions are not salary linked but you need to ensure they are proportionate to avoid HMRC asking questions.

It is a maximum net £32k annual limit for personal contributions (your pension provider will reclaim basic rate tax of £8k to bring this up to £40k. Any higher rate tax can be reclaimed on her tax return. She must have net relevant earnings to support any personal contributions though.

For company contributions it is a max of £40k gross a year regardless of earnings (but see reasonableness above). There is also no NI on these contributions and they can be offset against corporation tax. This is likely to be the way to go if the money is sat within the company. Highly tax efficient!

Welshbeef - I think you are referring to the state pension, rather than private pensions (sorry if I have this wrong - I should have cut and pasted your original comment!).

Re the SIPP/Pension issue, it is just a case of charges verses pot size (as Eddie has said). A flat (SIPP) charge is better for bigger pots and a percentage (Pension) charge is better for smaller ones. There are, however, many providers that do not charge for a SIPP/Pension these days (and soon none will, just as with ISAs).

Cheers

[oop north]

Welshbeef said:

One minor thing - on those 3 years did she pay NI and get qualifying years for state pension? If not you can pay in for up to 6 years historically - or simply ensure you have 35 qualifying years (as it currently stands) worth doing as ensuing a full state pension ticks off another component for retirement income.

Currently full state pension is £8,750pa not insignificant and a nice safety net.

You don’t need to have paid any nic (which starts with earnings from the primary threshold which is around 8400 this year) - you do need to have had salary at or above the lower earnings limit of circa 6000. So a low director salary of say 8000 will have no nic but gets a year’s credit.

The pension contribution does not have to be “proportionate” to salary paid as long as one is allowed to make pension contributions by salary sacrifice - it has been known for directors to have no salary paid and make large pension contributions. But you’d want to make sure your accountant is happy with that

[Welshbeef]

oop north said:

Welshbeef said:

One minor thing - on those 3 years did she pay NI and get qualifying years for state pension? If not you can pay in for up to 6 years historically - or simply ensure you have 35 qualifying years (as it currently stands) worth doing as ensuing a full state pension ticks off another component for retirement income.

Currently full state pension is £8,750pa not insignificant and a nice safety net.

You don’t need to have paid any nic (which starts with earnings from the primary threshold which is around 8400 this year) - you do need to have had salary at or above the lower earnings limit of circa 6000. So a low director salary of say 8000 will have no nic but gets a year’s credit.

The pension contribution does not have to be “proportionate” to salary paid as long as one is allowed to make pension contributions by salary sacrifice - it has been known for directors to have no salary paid and make large pension contributions. But you’d want to make sure your accountant is happy with that

You just need to check the state pension forecast and the detail behind it which years are qualifying and which not - if you have missing qualifying years within the last 6 years you can top it up well worth doing as no doubt they Govt will at some point increase the number of qualifying years from 35 to a higher number.

At the moment each qualifying year is worth £250 of state pension from your state pension age to death. Let’s say men live on average to 83 and start pension at 67 so £3,250 total state pension received for every qualifying year on average.

[Jockman]

Welshbeef said:

oop north said:

Welshbeef said:

One minor thing - on those 3 years did she pay NI and get qualifying years for state pension? If not you can pay in for up to 6 years historically - or simply ensure you have 35 qualifying years (as it currently stands) worth doing as ensuing a full state pension ticks off another component for retirement income.

Currently full state pension is £8,750pa not insignificant and a nice safety net.

You don’t need to have paid any nic (which starts with earnings from the primary threshold which is around 8400 this year) - you do need to have had salary at or above the lower earnings limit of circa 6000. So a low director salary of say 8000 will have no nic but gets a year’s credit.

The pension contribution does not have to be “proportionate” to salary paid as long as one is allowed to make pension contributions by salary sacrifice - it has been known for directors to have no salary paid and make large pension contributions. But you’d want to make sure your accountant is happy with that

You just need to check the state pension forecast and the detail behind it which years are qualifying and which not - if you have missing qualifying years within the last 6 years you can top it up well worth doing as no doubt they Govt will at some point increase the number of qualifying years from 35 to a higher number.

At the moment each qualifying year is worth £250 of state pension from your state pension age to death. Let’s say men live on average to 83 and start pension at 67 so £3,250 total state pension received for every qualifying year on average.

You are both correct. The efficient figure for this year is £8,424.

[cidersurfer]

Thank you for the info, it's really helpful to know we're in the right ballpark and the discussion around NI is something we will also confirm with the accountant.