Section 32 Buy-Out
Business owners to profit from pension flexibility
Posted on 12/02/2015. Filed under: cfp. chartered financial planner, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, CIMP, COMP, early retirement, EPP, Executive Pension, financial planning, Financial Planning, Higher Rate Pension Relief Restricted, Open Market Option, pension protection fund, pension tax relief, Pension Transfer Options, pensions v isas, personal pensions, Retirement Options, retirement planning, Sale, Section 32 Buy-Out, Sources of financial advice, SSAS, stakeholder pensions, state pension, tax free cash |
Business owners to profit from pension flexibility
Business owners looking to extract surplus profits from their business will be looking forward to April’s new pension income flexibility. Not only will pension funding remain the most tax efficient way to extract profits, but those funds will also become far more accessible than ever before.
Allowable contributions have the double benefit of reducing the profits subject to corporation tax, without incurring an employer National Insurance liability. Extraction by salary or bonus will reduce profits before tax, but will not side step NI.
The only previous downside for business owners was that pension funds were not as readily accessible as cash. But all that will change from April if the owner of the business is over age 55. This could lead to business owners seeking advice on how to maximise their contributions.
How much can be paid?
Potentially if someone has not paid anything into their pension for some time they can pay up to £230,000 now. This would be done in two stages. First, by using carry-forward from the 3 previous tax years. This amounts to £150,000 using allowances from 2013/14, 2012/13 & 2011/12. Plus, in order to carry-forward they would also have to pay the maximum £40,000 for the current year. Potentially they may also be able to pay a further £40,000 towards next year’s allowance now if their current input period ends in the 2015/16 tax year.
Unlike paying pension contributions personally, company contributions are not limited by the business owner’s earned income. Instead, the company just has to be able demonstrate that the contributions were ‘wholly and exclusively for the purpose of trade’. However, the company would typically need to have enough profits in the accounting year to get the full benefit of corporation tax relief.
The financial dangers of hoarding cash
There may also be a spin off benefit of paying surplus profits to a pension instead of capitalising it:
Inheritance tax
Shares in unquoted trading companies normally attract IHT business property relief (BPR). But cash built up in the company bank account or investments held within the company could be regarded as an ‘excepted asset’ and not qualify for BPR. To qualify for relief; cash has to have been used in the business in the past two years or earmarked for a specific future business purpose. Clients should always obtain professional advice to get clarity on their particular situation.
With many companies still stockpiling cash following the credit crunch, some business owners could be unwittingly storing up an IHT charge. Amounts over and above their company’s usual working capital could be included within their estate.
Paying into their pension could help ease this. There is typically no IHT payable on pension death benefits provided the contributions weren’t made when they were in ill health. Extracting the cash from the business in the form of a pension contribution could result in an immediate reduction in the business owner’s estate.
Capital Gains Tax
Holding excess cash in the business could cause similar issues when shares in the company are sold. Entrepreneurs’ relief is valuable to business owners as it can reduce the rate of CGT payable on the disposal of qualifying shareholdings to just 10%. To qualify the shares must be in a trading a company. A trading company for this purpose is one which does not include substantial non-trading activities.
While cash reserves are not looked at in isolation, holding substantial cash and other investments could contribute to a company losing its ‘trading’ status. And unlike BPR, entrepreneurs relief is all or nothing. If cash and investments trigger a loss in relief it affects the full value of the business disposed of; not just the non-trading assets.
CGT will not be an issue if they intend to pass their shares on death to other family members. But it could have huge implications for business owners approaching retirement and planning to sell their business as part of their exit strategy. Extracting surplus cash through pension planning to ensure entrepreneurs’ relief is secured on sale of the business will be an important consideration.
The cost of delay
Each year clients delay, the maximum amount they can pay using carry-forward will diminish. The annual allowance cut from £50,000 to £40,000 in 2014/15 will reduce the amount that can be carried forward by £10,000 for each of the next 3 years. By 2017/18 the maximum carry-forward will have dropped from £190k to £160k.
What difference could this make to your retirement pot? Well, if your planned retirement was in 10 years, a net annual growth rate of 4% after charges on £190k would provide a pot of over £281K. By contrast, waiting three years and investing £160k, the accumulated pot would be £210k – almost £71k less.
Time to act
With the main rate of corporation tax set to fall by 1% from 1 April it makes sense to bring forward pension funding to maximise relief. Paying contributions in the current accounting period will see a reduction in the profits chargeable at a higher rate of corporation tax.
All in all, there are many compelling reasons to use pensions to extract profits which aren’t required for future business use. And the longer they leave it the greater the danger of missing out on valuable reliefs.
Read Full Post | Make a Comment ( None so far )10 good reasons to pay into a pension before April
Posted on 09/01/2015. Filed under: Annuities, cash flow based modelling, cfp. chartered financial planner, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, CIMP, COMP, early retirement, Executive Pension, Executive Penson, financial planning, Financial Planning, Higher Rate Pension Relief Restricted, Higher Rate Pension Tax Relief Restricted, investment, Open Market Option, passive investment, pension protection fund, pension tax relief, Pension Transfer Options, pensions v isas, personal pensions, Retirement Options, retirement planning, Sale, Section 32 Buy-Out, Sources of financial advice, SSAS, stakeholder pensions, state pension, tax free cash |
There are less than three months to go before the new pension freedom becomes reality. With the legislation now in place, the run up to April is time to start planning in earnest to ensure you make the most of your pension savings.
To help, here are 10 reasons why you may wish to boost your pension pots before the tax year end.
1. Immediate access to savings for the over 55s
The new flexibility from April will mean that those over 55 will have the same access to their pension savings as they do to any other investments. And with the combination of tax relief and tax free cash, pensions will outperform ISAs on a like for like basis for the vast majority of savers. So people at or over this age should consider maximising their pension contributions ahead of saving through other investments.
2. Boost SIPP funds now before accessing the new flexibility
Anyone looking to take advantage of the new income flexibility may want to consider boosting their fund before April. Anyone accessing the new flexibility from the 6 April will find their annual allowance slashed to £10,000.
But remember that the reduced £10,000 annual allowance only applies for those who have accessed the new flexibility. Anyone in capped drawdown before April, or who only takes their tax free cash after April, will retain a £40,000 annual allowance.
3. IHT sheltering
The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members – there’s typically no IHT payable and the possibility of passing on funds to any family members free of tax for deaths before age 75.
You may want to consider moving savings which would otherwise be subject to IHT into your pension to shelter funds from IHT and benefit from tax free investment returns. And provided you are not in serious ill-health at the time, any savings will be immediately outside your estate, with no need to wait 7 years to be free of IHT.
4. Get personal tax relief at top rates
For those who are higher or additional rate tax payers this year, but are uncertain of their income levels next year, a pension contribution now will secure tax relief at their higher marginal rates.
Typically, this may affect employees whose remuneration fluctuates with profit related bonuses, or self-employed individuals who have perhaps had a good year this year, but aren’t confident of repeating it in the next. Flexing the carry forward and PIP rules* gives scope for some to pay up to £230,000 tax efficiently in 2014/15.
For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill if they had scope to pay £100,000 now.
* Contact me if you don’t know what this is.
5. Pay employer contributions before corporation tax relief drops further
Corporation tax rates are set to fall to 20% in 2015. Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest. For the current financial year, the main rate is 21%. This drops to 20% for the financial year starting 1st April 2015.
6. Don’t miss out on £50,000 allowances from 2011/12 & 2012/13
Carry forward for 2011/12 & 2012/13 will still be based on a £50,000 allowance. But as each year passes, the £40,000 allowance dilutes what can be paid. Up to £190,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000. And don’t ignore the risk of further cuts.
7. Use next year’s allowance now
Some may be willing and able to pay more than their 2014/15 allowance in the current tax year – even after using up all their unused allowance from the three carry forward years. To achieve this, they can maximise payments against their 2014/15 annual allowance, close their 14/15 PIP early, and pay an extra £40,000 in this tax year (in respect of the 2015/16 PIP). This might be good advice for a individuals with particularly high income for 2014/15 who want to make the biggest contribution they can with 45% tax relief. Or perhaps the payment could come from a company who has had a particularly good year and wants to reward directors and senior employees, reducing their corporation tax bill.
8. Recover personal allowances
Pension contributions reduce an individual’s taxable income. So they’re a great way to reinstate the personal allowance. For a higher rate taxpayer with taxable income of between £100,000 and £120,000, an individual contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.
9. Avoid the child benefit tax charge
An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other. The child benefit, worth £2,475 to a family with three kids, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved can lead to effective rates of tax relief as high as 64% for a family with three children.
10. Sacrifice bonus for employer pension contribution
March and April is typically the time of year when many companies pay annual bonuses. Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay. And the employee’s taxable income is reduced, potentially recovering personal allowance or avoiding the child benefit tax charge.
Changes to the UK State Pension
Posted on 09/12/2014. Filed under: A step by step approach to producing a financial plan, cash flow based modelling, cfp. chartered financial planner, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, Executive Pension, Executive Penson, financial planning, Open Market Option, pension tax relief, Pension Transfer Options, pensions v isas, personal pensions, Professor Kenneth French, PTR, retirement planning, Sale, Section 32 Buy-Out, Sources of financial advice, SSAS, stakeholder pensions, state pension |
The Department for Work and Pensions has just launched a new campaign to explain the new single-tier state pension.
The new single-tier state pension, which will replace both the basic state pension and the state second pension (S2P) is now only 16 months away. While the focus of late has been on increased flexibility for private pensions, the state pension reform is in some respects more significant, if only because it will affect many more people.
The Department for Work & Pensions (DWP) has launched what it describes as a “new multi-channel advertising campaign” which it hopes will “ensure everyone knows what the State Pension changes mean for them.” That may be a tall order to judge from some research results which the DWP published alongside the press release announcing its new campaign. That research showed:
• 42% of people yet to retire admitted that they needed to find out more about saving for retirement;
• 38% conceded they “try to avoid thinking about” what will happen when they stop working;
• Only 60% of those surveyed realised it is possible to take action to increase their State Pension; and
• 37% of those aged 65 or over thought (wrongly) that the amount of their state pension will change as a result of the reforms. Although the DWP did not ask the obvious question, the chances are very few in that group were expecting a cut in payments after April 2016.
The DWP’s ministers “are urging everyone – and the over-55s in particular – to look at what the changes will mean for them and to secure a detailed State Pension statement so that everyone can plan accurately for retirement.” It is a recommendation we thoroughly agree with. However, be warned that if you have ever been a member of a contracted pension scheme you could well find that your projected state pension is less than “around £150 a week”, which is commonly quoted – even by the DWP in its press release.
Read Full Post | Make a Comment ( None so far )Temporary Transfer Relaxation for pensions carrying higher tax free cash or early retirement age
Posted on 22/11/2014. Filed under: A step by step approach to producing a financial plan, cash flow based modelling, cfp. chartered financial planner, Cheshire, chris wicks, chris wicks cfp, ChrisWicksCFP, CIMP, COMP, early retirement, EPP, Executive Pension, Executive Penson, financial planning, investment, Open Market Option, passive investment, pension protection fund, pension tax relief, Pension Transfer Options, pensions v isas, personal pensions, Retirement Options, retirement planning, Sale, Section 32 Buy-Out, Sources of financial advice, SSAS, stakeholder pensions, state pension, tax free cash |
Formerly pension scheme members with schemes carrying a higher entitlement to tax free cash or an early retirement age would loose these when transferring to a new plan, unless at least one other member of the same scheme transferred with them at the same time, to the same scheme. For schemes without any other members, such as section 32 plans, one person EPPs or assigned policies, this meant that the option to preserve protections when transferring to personal pensions was not available.
However, solo transfers are now permissible, as long as the following criteria are met:
• The transfer must fully extinguish all rights within the current plan
• The transfer must be made in a single transaction
• The transfer must be completed before 6 April 2015
• The new plan must be fully crystallised (including any other rights held within the new plan) before 6 October 2015
• Benefits are payable from age 55 (unless a protected retirement age is available).
As the transfer must be completed before 6 April, the investor would also have the choice to set up a capped drawdown arrangement, should they wish to retain the higher annual allowance. It should also be noted that any GMP benefits will be lost on transfer.
So what does this mean?
Pension scheme members who have held off transferring their benefits due to a potential loss of tax free cash or because they will loose the ability to retire early may now make an individual transfer to a new plan without loosing the enhanced benefits.
Who does this affect?
• Sports people and members of professions who were previously entitled to early retirement ages
• Members of occupational defined contribution pension schemes such as Executive Pensions, Small Self Administered Schemes (SSAS), Contracted Out and Contracted In Money Purchase Schemes (COMPs and CIMPS)
• Those who have transferred their benefits to a Section 32 Buy-Out
This is a complex area and advice from a pensions specialist should always be taken before implementing any transactions.
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