If you’re a business owner who’s ignored pension provision until now, the new regime should make you sit up and take notice.
In the past, it’s been hard to persuade some small business owners to take pensions particularly seriously. Many may have had other investments and will have been relying on them to produce a suitable income in retirement. The restrictions in the pension rules and what you were able to draw down was certainly a psychological obstacle for a number of people.
Since the change in the regulations earlier in 2015, clients have definitely been taking more notice and have been actively reviewing their options. Some have decided to increase their company pension contributions, restrict their personal income and take tax-free cash straight away. As it’s possible to go back three years in your calculations, contributions per individual can be maximised.
When you put in additional pension contributions and draw tax-free cash, it may be possible to preserve your personal allowance for the current year. What’s more, by reducing your income, you may find yourself going down the marginal tax bands.
The company gets relief on the contributions and individuals are entitled to draw up to 25% of the fund as a tax-free lump sum. (If you draw any income, you restrict the amount you can pay into pensions in the future.)
Another point worth making is that the pension fund can be quite a useful and low-cost life assurance vehicle. That’s because if you die under the age of 75, the proposals are that the full fund will go tax free to any nominated beneficiary.
In some instances, it may be possible for a pension scheme to purchase a commercial property from the individuals that currently own it, effectively releasing equity into their own names. As well as helping with cash planning, this strategy can also reduce exposure to inheritance tax.
So now, with the new regime in place, there are plenty of interesting talking points. Overall, I try to help my clients achieve a balanced portfolio with a spread of risks. Pensions are a more important part of the equation than ever because of the increased freedoms.
With changes to dividend rules coming into effect in April 2016, I suspect accountants will be having even more conversations with clients who are looking at this issue in a new light.