Retirement review
Whether you are dreaming of long days on the golf course, a holiday home in the sun or a yacht on the open seas, we have a solution to meet every goal you have. How you achieve it will depend largely on your intended retirement age, income and attitude to risk but we will assess all of these when we review your retirement plans.
Some contractors view their property as a pension but this is becoming less attractive as property prices stagnate. Even if you are lucky enough to have equity in your home to fall back on then it may still be worth considering a pension investment because of the tax breaks that it offers today.
Cut your company and personal taxes with a pension
Tax planning avenues are increasingly being blocked by a government ever more desperate to maximise revenues. The good news is that there are very compelling tax planning opportunities associated with pension investment which could enable you to slash the proportion of your corporate and personal income that goes to HMRC.
Contractors can now personally invest (i.e. direct from your private bank account) up to 100% of salary into a pension and still benefit from income tax relief at your highest marginal rate (i.e. the government could be paying £4 for every £6 that you contribute). Subject to minimum ages, you can invest into the pension to cut your tax bill today, immediately withdraw 25% of the fund tax free and yet not even formally retire.
As a business owner you may choose to draw a tax efficiently low salary (to help reduce National Insurance) which will limit the scope for personal investment but this need not limit your ability to reduce company and personal tax bills by making a pension contribution. Thanks to ‘pensions simplification’ you have more scope to invest if we get the company to fund the scheme on your behalf and in good trading years a hefty corporation tax bill could potentially be reduced to nothing.
Your pension can also become a central plank of your business by exploiting the freedom to own commercial property. You can hold business premises via a Self Invested Personal Pension (SIPP) with the pension in turn charging your company rent, helping to inflate the size of the pension pot even further.
Your employees can benefit too
If you have any employees then you may choose to contribute to a pension on their behalf. An employee benefits package is becoming increasingly important and a pension not only aids initial recruitment but can also help staff retention.
If you contribute on behalf of your employee then it is treated as an allowable business expense which can help reduce corporation tax. Unlike other forms of staff incentives there will be no National Insurance cost to you or the employee and no benefit in kind implications. Alternatively, an employee can invest personally (i.e. direct from their private bank account) up to 100% of their salary into a pension and benefit from income tax relief but salary sacrifice could be a far more lucrative method of investing.
If you choose to offer a salary sacrifice scheme then an employee can elect to transfer part of their gross salary into a company pension scheme, avoiding not only income tax but also employee’s National Insurance too. In addition there is a reduction in employer’s National Insurance which is due by virtue of the reduced salary and it is your decision whether to pocket this saving or pass this money into the employee’s pension instead.
Investing for retirement
You can help maximise the potential of your investments with a wide range flexible solutions for contractors. The extensive experience of the advisers at ClearSky Wealth Management means that they can search thousands of investment funds to find the right solutions for you.
One of the most popular investment routes amongst contractors is an Individual Savings Account (ISA) because of its significant tax breaks and flexibility. There are a number of key benefits for an ISA investment:
- You can invest up to £10,680pa each year into an ISA account with up to £5,340pa in a cash ISA. As of November 2011, contractors can also invest up to £3000pa in a Junior ISA on behalf of a child which they can then access on their 18th birthday.
- There are a wide range of ISAs to choose from so you can find the best solution to your needs.
- ISAs offer a flexible investment option that is suitable for medium and long term investments and with most you can draw out your savings at any time.
Make the most of your savings
With HMRC’s continuing efforts to remove the tax breaks available to contractors, now more than ever it is important for you to take advantage of the few remaining options available.
Since 6th April 2011 the ISA allowance has increased to £10,680. ISA investors can deposit a maximum of 50% of the allowable portion in a cash based ISA, 100% in an equity (stock market) based ISA or a mixture of both.
Investing in an equity ISA is one of the most popular options and stock market based investments historically offer the best returns as long as you can accept that your funds may fluctuate in value. It is often best to opt for a term of five years or more so that your savings have a chance to grow and hopefully ride out any dips in the stock market. We search thousands of options to short list the funds that have a history of positive performance and strong prospects.
For investors with a low risk tolerance or those who need to have access to their savings in the short term, a cash ISA would probably be more suitable as savings can be accessed instantly. With a cash ISA you should benefit from a higher interest rate than you would gain in a high street savings account because banks view ISA investments as a longer-term commitment and reward this with extra interest.
A protected ISA offers a compromise between the cash and equity ISAs. It tracks the stock market but it carries a protection policy for the underlying value of the fund allowing contractors to benefit from the potential for growth in an equity ISA with the security of a cash ISA.
Pension or ISA?
Ideally both if affordable, as the pension offers substantial up-front tax breaks whilst the ISA offers accessibility. This ability to access your savings at any time with an ISA carries dangers as you are more likely to take money out leaving no long term nest egg. The pension cannot be accessed until you are 55 which ensures you will have a pot for your retirement.
Clearsky Wealth Management will be happy to advise you on your investment options, to find out more please call 0845 060 8800 or fill in our contact form.
Financial advice is given by ClearSky Wealth Management, which is a trading name of Contractor Financials Ltd and is regulated and authorised by the Financial Services Authority.
The value of investments may rise as well as fall and past performance is not a guide to future returns.
