Your pension: rarely has there been something so dull, yet so important.
Not only does it pay the bills when you no longer want to, or can, work, but it gets topped up by the Government and, if you have one, your employer too.
What’s not to like?
We bet you’re still not excited though. For some reason, we can get hugely excited by house prices or stock markets, but for pensions, it’s all just a bit uninspiring.
So, in the spirit of promoting excitement about your pension (we are nothing if not ambitious!) here are six things we bet you didn’t know you could do with your pension.
1. Buy your business premises with it
If you run your own business, your quarterly rental payment will be one of your largest outgoings.
But buying your own premises will tie up capital, in the form of a deposit, and commit you to monthly loan repayments.
Your pension might be the answer. It can buy premises for your business to trade from, and can even borrow money to help fund the purchase. Your business will still pay rent, but it’ll go to your pension, helping to increase your income in retirement. Furthermore, any increase in the value of the property will be free from tax.
Using their pension has unlocked the door to property ownership for many business owners, yet so many don’t know they can do it.
There are disadvantages of course. If your business goes bust, your pension will suffer as rental payments will cease until an alternative tenant can be found. Furthermore, it could lead to an undesirable concentration of assets in one area; commercial property.
Despite these issues, owning commercial property, in your pension, can help many business people move their business forward.
2. Use it to help you retire early
Many people, although certainly not all, want to retire early.
Your pension coupled with the relatively new Pension Freedom rules, might just help you do that.
The State Pension is the basis of most people’s income in retirement. Until it kicks in, many people can’t afford to retire. The answer, therefore, for those people wanting to retire early, is often to take more money from your private pensions, until their State Pension starts. Then reduce the money taken from their private pension, to ensure that it lasts until it is no longer needed; when you or your spouse are dead.
This flexibility, to increase and decrease the amount you are taking from your pension, is now possible, without limit, due to the new Pension Freedom rules.
Yes, you need to be careful. Taking too much money out of your pension, too early, might leave you facing financial difficulties in retirement. But, managed carefully, the new Pension Freedom flexibility could be the answer to an early retirement.
3. Use it to reduce your tax bill
Pensions qualify for tax-relief, this works differently depending on whether you are employed, self-employed or your contributions are coming from a business you control.
However, they all have one thing in common. Making pension contributions can help higher earners reduce their income tax bill and businesses their Corporation Tax bill.
The exact saving will depend on how much you contribute and a range of other factors. We are, of course, happy to explain more.
4. Pass it on tax-free to your loved ones
The pension rules have changed significantly over the years. Many people are naturally therefore confused about what happens to their pension when they die. This could lead to the misapprehension that it is lost and consequently lead people to pay less in to their pension.
Exactly what happens to your pension pot depends on when you die.
Money held in your pension is not included in the value of your estate when calculating any Inheritance Tax (IHT) payable on your death.
Even though other taxes, which are dependent on when you die, may be payable; the pot is certainly not lost.
Death before turning 75: Irrespective of whether they take an income or lump sum from your pension, any money the beneficiaries take is tax-free. As an alternative, they may decide to keep the pension and take a tax-free income.
Death after turning 75: Your beneficiates can take either an income, or lump sum, but will be taxed at their marginal rate (20%, 40% or 45%) on any money they receive.
5. Invest in a variety of different things
Historically when they paid into a pension, investors were given the choice of a range of funds to pick from. Those taking financial advice would have been recommended which to pick, if you were going it alone, or had joined a workplace pension, you probably had to pick the funds yourself.
This has led to many people believing that investing in funds was their only option. It isn’t.
A Self-Invested Personal Pension (SIPP) has many of the same rules as a Personal Pension relating to access, tax-relief etc, but has wider investment powers. A SIPP can invest in funds, if you wish, but call also hold deposit accounts, Investment Trusts, commercial property and a range of other investments.
If the thing putting you off pensions is the fact you can only invest in funds, then think again. Of course, any investments you choose, including funds, must match your attitude to risk.
6. Get ‘free money’ for your children
Pensions for kids? Yes, it’s possible and not as crazy as it sounds. Even though your child might not be out of nappies yet, planning for their retirement, if you have the spare income and other things such as the cost of university covered off, might make sense.
There’s some ‘free’ money in it too.
Even though your children are probably not taxpayers they can still get tax-relief on any money you pay in to a pension for them. Every £80 you pay will be topped up by £20 from the Government, up to a maximum of £720 each year.
If you were to contribute the maximum each year, that would mean they get £12,960 in tax-relief over the first 18 years of their life. That’s completely free money.
Sure, they can’t access it until much later in life. But, you will give them a head start in planning for their retirement, which they can build on during their working life.
Excited about pensions yet?
Let’s be fair, that’s probably too much to ask, but hopefully we’ve at least shown you that:
- Pensions don’t have to be dull
- They can help your business along the way
- They’re flexible enough to help you retire early
- Your employer and the Government will pay in too
If you would like to discuss any of the issues raised in this article, or have questions about your own pension planning, please don’t hesitate to get in touch.
We can be reached on 0207 808 4120 or email enquire@london-money.co.uk.