Pensions: A Gold Mine Opportunity
How to get the most out of a pension investment
Our sole aim at incloud accounting is to help our clients make as most profit as possible. There are many areas in business where real value can be added and revenue streams boosted; it’s our job to know how to make the most out of these opportunities so we’re going to explain how you can get the most out of pensions.
To understand how we can get value from pensions, we first need to create a situation, a demographic, a subject for the example we are using.
Let’s call our subject for the article Clive Lynch.
• Gender: Male
• Marital status: Single
• Age: 55
• Salary: £85,000
• Tax Paid: £24,000 (higher rate)
Clive’s Current Situation:
Employed full time, hadn’t considered a personal pension plan as recently pensions have been given bad publicity with poor returns and high commission by the provider (which is now outlawed and it’s about time too!) Clive has been paying into the higher rate of tax for some years now.
Discover the gold
Now we may be chartered accountants but we do not give financial investment advice (you know the kind; the higher the reward the greater the risk) however, in this situation we can make a sound financial decision that can release cash and save tax at the same time – bingo!
If you have had a salary high enough to put you in the top tax bracket, then it’s worth considering as we do, for many our clients in the following tax year 2014-15.
Now you’re thinking, “From this situation, how can I find value?”
By utilising current year tax allowance of £40,000 and by paying a £32,000 pension contribution net of basic rate tax, Clive is now able to draw down 25% of the pension pot, plus he gets a tax refund of £8,000 totalling £18,000. So a net outlay of £14,000 Clive now has £30,000 still in his pension and he’s made 114% in return!
The remaining funds in the pension could then be drawn as and when required subject to Clive’s circumstances. In a worst case scenario the full £30,000 could be withdrawn. However, this would give rise to a tax charge (at 40%) being £12,000, leaving Clive £4,000 better off.
Still, Clive would be limited to only being allowed to contribute £10,000 per annum to a pension, where as Clive only took a capped limited draw down, he could repeat this exercise each year.
A final word
The basic principals outlined above are even more favourable when looking at an owner managed business and company pension schemes. Cash flow and up to date management accounts play a vital role in timing of contributions and draw down and by using incloud accounting systems we can predict with a greater degree of accuracy future trends and minimise tax.
In addition; where husband and wife are involved; there are considerably more savings to be had, but that’s a story for another time…….
If you would like to know how we can add value to your business operations, have any questions regarding tax or would like to know how to get the best savings, get in touch with the incloud accounting team today, we are always happy to help!