RSS Feed

Related Articles

Related Categories

Five top tips - key retirement considerations for SME workers

3rd November 2014 Print

For many small business (SME) owners, the time they take running their business can lead them to neglect considerations such as planning for your retirement.

There are, however, things that could be implemented now which can greatly help your pension fund down the line.

Andy James, head of retirement, Towry, offers some key points for SME owners to be aware of when planning their pensions:

“SME owners should bear in mind restrictions on how much can be saved on a tax-free basis each year. During the current tax year, the annual allowance for tax relieved pension savings stands at £40,000. However, despite the reduced rate there is a protection regime in place for those who may wish to save more than £40,000 via carry forward, a flexible system designed to help those whose total pension savings for the tax year may exceed the annual allowance. This allows an individual to ‘carry forward’ any unused allowances from the previous three tax years into the current tax year, provided they maximise their current year’s contributions first – so an unused annual allowance from 2011/12 will not be lost if used by 6 April 2015. This will allow a business owner to defer pension contributions if you want to keep money liquid. You could put money into ISAs initially or hold it within the business and switch to pensions for the tax relief at a later stage when you are sure that the money isn’t going to be required in the business.

“If you have a limited company, it will be more tax efficient for the company to be making pension contributions rather than them taking income and putting it into a pension. This is because income will incur national insurance, whilst the pension contribution will not.

“If you have a company small enough that you do not need to sell, then it can be used as a second pension fund, accruing cash as you approach retirement and then paying it out for several years after you have stopped working full-time on the business. This will reduce the tax burden, and as pension income can be taken flexibly from next year, you can decide year by year in retirement whether to draw dividends or income.

“If you have a business that can be sold, it is vital to begin planning an exit strategy at an early stage if it is to be a success and fully aligned to your retirement objectives.  Make the best use of the available tax breaks by ensuring you qualify for entrepreneur’s relief so that business proceeds are only subject to capital gains tax at 10%. Remember also to use your annual capital gains tax allowance, which is the tax break most commonly missed. You should then use these proceeds to build a retirement portfolio that will fund you alongside your pension. If you don’t qualify for Entrepreneur’s Relief, ask for the proceeds of the business to be phased out to you over as many tax years as is sensible to make full use of tax allowances. Take shares in the new business only if they pay dividends or there is a clear capital exit plan, consider taking loan notes if possible.

“Include your spouse (and other family if appropriate) in the business if you can. This will serve the purpose of paying income out tax-efficiently during the life of the business, but you should only accrue pension in the spouse’s name if they would otherwise pay the higher rates of income tax. Accrue assets in the spouses’ name to make use of their tax-free income tax and capital gains tax allowances as well as using tax wrapped investments such as ISAs.”