We speak to a lot of small business owners and the suggestion of pension contributions is often derided. However recent changes to the tax treatment of private pension contributions make pension contributions an essential tool in the armoury of getting money out of a small business.
In the past the perception was that pension contributions were tax efficient at the time you made them but there were a number of downsides:
- The charges on the pension while it was invested were very high.
- When retirement age was reached there was no flexibility. You bought an annuity which gave you a low return, and then if you died early your children got nothing.
- You were locking your money up forever so if you sold your business and wanted to buy a dream house or boat your pension wouldn’t help.
In the last few years the rules have been relaxed and George Osbourne this week trailed the finishing touches to the changes in the rules.
So to address the downsides above:
- There are now very low cost pensions available. We are not allowed to give investment advice but your IFA can advise on avoiding high charges.
- There is now almost total flexibility in what you can do when you get to retirement age. The rule changes coming soon mean you will be able to just withdraw money from your pension pot, take 25% of it tax free and pay your existing rate of income tax on the rest.
- Rules coming soon mean that in certain circumstances your children will be able to inherit your pension pot and continue to receive the income.
You will need to take independent financial advice as to whether a private pension is right for you, but from a tax angle it is becoming a no brainer. Our next blog post will give some examples of how it could work for you.