Pension Planning for Business Owners
Business owners face unique rules and challenges in your retirement planning. So what kind of pension plan do you need?
What kind of pension plan do I need as a business owner?
It can be tempting as a business owner to put off pension planning, and think: “I’ll build up my business first, and drop a lot of money into my pension later.”
This, unfortunately, carries a big risk. In 2019-20, the Annual Allowance only allows you to put up to £40,000 a year into a pension, tax-free, and in certain cases this cap can be even lower (e.g. if you earn over £150,000). By putting off your pension planning, you therefore potentially place yourself in a difficult financial predicament down the line.
There are positive reasons too, however, to think about this now.
As a business owner, you will likely know that there is great power in compound interest, which allows you to accelerate your investment returns the longer time goes on.
The earlier you start planning your pension, the greater your potential for a comfortable, desired retirement in the future.
There is one common tendency amongst business owners which you must be wary of, and that is the assumption that the future sale of your business will fund your retirement. If your business sector later fails or the economy is weak then you might not find a buyer.
Alternatively, you might succeed in making a strong sale, but this can take a while to conclude and you will need to take various fees and taxes into account.
This isn’t to say you cannot include the future sale of your business into your overall financial plan, only to recommend that you do not put all of your eggs in one basket.
For business owners, pension planning is not usually straightforward. You face unique rules and challenges in your retirement planning, which other people are not presented with. At the same time, however, you also face some unique opportunities.
"For business owners, pension planning is not usually straightforward. You face unique rules and challenges in your retirement planning, which other people are not presented with."
Let’s turn, first of all, to business owners at limited liability companies before concluding with some thoughts dedicated to sole traders:
Pension contribution options
As a business owner at a limited liability company, you have a few options.
You could contribute to a workplace pension out of your own salary, with the company making contributions as well (i.e. just like the rest of your staff who are under auto enrolment).
Another option is to contribute to your pension directly from your limited company. This carries two unique advantages: 1/. You can deduct these contributions as a business expense (thereby potentially reducing your corporation tax); and 2/. You do not need to pay national insurance on these contributions.
This might sound like the best option for building up your pension. However, be aware that to make employer contributions like this you need to meet HMRC’s criteria, which stipulate that the contributions are ‘wholly and exclusively’ for the purposes of business. We recommend that you speak with your accountant and a qualified financial planner about this, to ensure you do things properly.
One thing to be aware of as a business owner concerns how much you take home in dividends and as a salary. In 2019-20, you can contribute up to 100% of your annual salary per year into a pension, tax-free, capped at £40,000.
Dividends are not counted as “relevant earnings”, so if your dividend earnings are high and you take a small salary, you will face a lower limit to your own annual allowance.
To get around this you could make pension contributions directly from your company, as explained above.
If not, then you might have to change your salary-dividend ratio in order to raise your annual allowance.
SSAS & SIPP schemes
A slightly different subject from how you should make contributions concerns which type of pension you should contribute to.
There are a range of options but here, we will focus on two broad types which you might want to discuss with your financial planner.
A Self-Invested Personal Pension (SIPP) is one possible course you might take, and can be a good option for those who want to take a more active role in their investments.
They typically contain a wider range of investment options compared to other personal pensions (e.g. commercial property), although the charges involved are often higher.
A Small Self Administered Scheme (SSAS) is a popular option for small and family-run businesses. It is set up by company directors, administered by trustees and allows up to 12 members.
One reason why they are attractive is because the SSAS can invest in the business and lend money to it, but this can put the members’ pensions at risk.
Again, it’s a good idea to discuss this option with your accountant and financial planner if you are considering it.
If you run your own sole trader business, then you face a different landscape with regards to pension planning. You have no employees and you are not an employee yourself. There is no occupational pension scheme in place, where both you and your employer make contributions to your pension pot.
Legally, you are not required to create a workplace pension scheme and sign up to it. However, it is a good idea to make other arrangements to plan for your future retirement. Whilst you will not benefit from employer contributions to your pension in addition to your own, you should still be entitled to tax relief from the government.
This effectively means that for every £100 you contribute to your pension, the state adds another £20. For Higher Rate taxpayers the benefit is even better, with the government “topping up” a £100 contribution by £40 (subject to overall contribution limits).
You might choose to contribute to a personal pension, or possibly to NEST (The National Employment Savings Trust). Just remember to start as soon as possible, and to seek professional, financial advice if you are keen to discover the very best options available to you over the long term.
The earlier you can start planning for retirement, the easier it will be and the more you'll potentially benefit. Punter Southall Aspire offer advice on retirement planning for people at any stage of life.