Entrepreneurs aren't noted for their ability to save money, but failing to do so could land you in hot water in retirement.
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Is it time you started thinking about your pension? It’s usually not until later in life that we start to consider our pensions and what effect a pension can have on our lives, but in truth, it’s something that should be prioritised as early as possible.
The problem is, where do you start?
Trying to understand the vast number of pension options can be intimidating, so here are some tips to help get you started.
1. Private Pension
Next to your workplace pension, if you have one, a personal pension is the most traditional way to boost your retirement fund and the earlier you start making contributions, the better.
There are different types of private pension so be sure to shop around for the one that best suits you.
Personal pensions are provided by a pension provider such as an insurance company or bank, which will claim tax relief and then add it to your pension pot.
Are you a higher rate taxpayer? Did you know that it’s possible to claim a refund via your self-assessment tax return?
Remember that it’s never too early to start thinking about making contributions to your private pension.
2. Property Investment
Clued in to the significant number of people who have decided to become landlords and build property portfolios to fund retirement, the government have made significant changes over the past few years to Stamp Duty and, more recently, to the ability to offset interest on buy-to-let mortgages.
That's in addition to the removal of the 10% wear and tear allowance meaning that the attractiveness of property investment has greatly diminished.
You do have the option of forming a LTD Company that can hold the property. However, it’s important to be aware that it’s not possible to move assets that are held in your own name to a limited company without incurring a Capital Gain plus Stamp Duty on the transfer.
3. Other Investments
If you’re looking for different types of investment to help fund your retirement, there’s plenty to choose from, including;
· Stocks & Shares ISA's allow you to benefit from tax-free growth and tax-free income in retirement. This is because dividends on your shares will continue to be tax-free and, therefore, will not influence your dividend allowance.
· Unit Trusts/Collectives present an opportunity for you to take advantage of capital gains to generate £11,700 of tax-free income each year.
· Venture Capital Trusts provide 30% income tax-relief on all investments made and also deliver a tax-free dividend that can supplement your income. As you’re investing in early-stage companies, this is a much higher risk investment. However, the tax-reliefs are attractive enough that it’s not worth overlooking.
· Other – There are plenty of other tax investments that you can use to create a more tax-efficient income in preparation for your retirement. It’s simply a case of doing your research.
4. Pensions for a Ltd Company
Any payments you make to a company pension can be deducted as a company expense.
What this means is that you have the ability to reduce or clear any liability to Corporation Tax, allowing you to use pension payments to manage company tax and profit extraction.
However, it’s important to note that only contributions paid before the year-end will be applicable during that accounting period.
As an employer, you’ll also be exempt from NI Contributions on pension payments.
You’ll even have the opportunity to contribute up to £40k to your pension during the current tax year by utilising any pre-tax business profits and also carrying forward any unused claims from the past three years. What does this mean? You could contribute up to £160,000 to your retirement fund.
According to recent research carried out by Schroders, a 25-year-old wishing to retire with a two-thirds pension at 65 years old should be putting 15% of their salary away each year.
With this saving plan and an average return of 2.5% above inflation p/a, their retirement fund would be enough to match their target.
However, if the same person chose to only save 10% of their yearly salary, the return needed would rise to 4.2% over inflation p/a.
Again, if that same person saved just 5% of their annual salary (which is the current overall min. contribution rate for auto-enrolment), he/she could end up needing returns that exceed inflation by 7%. If that person was to wait until age 40 and the returns would need to be at least 20% of their income.
To conclude, no matter which retirement option(s) you choose, it is essential to start planning and saving sooner rather than later.
Appropriate planning is the key to ensure that you don’t work until you drop. Set clear goals and review them regularly to ensure that you’re investing your funds correctly to meet your goals.