Pensions are on everyone’s minds at the moment. You’ll no doubt have seen ‘Workie’ the workplace pensions monster in a series of TV and media ads recently, explaining how your small business can’t ignore the new auto enrolment changes to workplace pensions.
Cute, isn’t he. But are you any the wiser about how pensions can affect your own retirement? Nah, we thought not.
So we thought it would be good to explain exactly why it’s such a good idea to contribute to a pension scheme, both for you and the rest of your agency team.
So here’s our run down on personal pensions…(we’ll keep it brief, don’t worry)
What the hell is a pension anyway?
Pensions are a vehicle. Not a very sexy, sports car-style vehicle, but one that’s used to package-up a bundle of investments and shares.
You pay regular, monthly contributions into this pension, and that funds all your various investments and creates income for the businesses and organisations that you’ve invested in.
What it’s not is a pot of real money (calling it a ‘pot’ is just a convenient metaphor). You may pay 10k in pensions contributions, but there’s no one piggy bank with this money in – you can’t get your hammer and crack open ‘Mr Porky’ to get your money back anytime you want. You’ve invested it, not saved it.
So, I hear you cry, how is this going to pay for my retirement? We all want that pension to give us a steady income once we’re out of the job market.
But where does that money come from?
How do I get my retirement income?
It used to be that there were limited options when you retired and finally wanted to get your grubby mitts on the money you’d invested in your pension.
But there were some quite big changes to the pensions systems as of April 2015, so you’ve now got 6 basic options:
- Guaranteed income (annuity) – An annuity is insurance product that pays you a set income each month for the rest of your life, based on the money you’ve taken from your existing pension.
- Adjustable income (drawdown) – Your ‘pension pot’ is invested to give you a regular income and you can decide how much, how often and for how long.
- Take cash in small chunks – You can take out small amounts out of your pension pot until you’ve used it all up. But when it’s gone, it’s gone.
- Take the whole pot in one go – You can take all your money out in one big, fat lump. But only the first quarter is tax-free – you’ll be taxed on the rest of this lump sum (which can be quite a substantial chunk!).
- Leave your pot until you need it – If you don’t need this income just yet, you’re not forced to draw it down.
- Mix it up – You can use a mixture of all of the previous 5 options to create an income that works for you and the money you need.
Knowing what you want from retirement
So, now you know how get your hands on the money. But how do you know how much to contribute in the first place?
The answer is pretty simple. You need to sit down and work out the kind of lifestyle you want in retirement.
Are you going to take 4 holidays a year and live for six months in a beach house in the Bahamas? Or are you going to take one holiday a year and spend the rest of your time working your way through Mary Berry’s latest baking cookbook and pottering around on your allotment growing amusingly misshapen vegetables?
Work out what income you’ll need to fund your lifestyle of choice. And then talk to a pensions specialist how much you’ll need to contribute each month, and for how long, to be able to fork out the cash for that beach house (or that ‘right tidy’ shed you want for the allotment).
Being tax-efficient with your contributions
You’ll want to pay as little in tax on your pension contributions as possible, right?
The most efficient way to pay your contributions is through your limited company where you can take advantage of the corporation tax benefits. If you’re a higher rate taxpayer, instead of declaring the income as company profit and taking the income as a?dividend, you can put this money straight into your pension.
Have a pensions chat with us
All this new flexibility around your pensions options is certainly great news. But by making things so much more flexible, it’s also created a certain amount of complexity for the average punter.
- How do you know which of the six options to go for when cashing in your pension pot?
- How do you get an accurate idea of the income you’ll need in retirement?
- How do you know the right amounts to make as contributions?
- How do you know the most tax efficient ways to pay into your scheme?
If you’re reading this and thinking ‘HELP!!!!!’, then you’re not alone. And that’s why we’re here, to help you get a better handle on pensions and to work with you to make the right decisions about your retirement planning.
Come and have a chat with us about your pension. We’ll show you exactly how to set a scheme up, and we’ll make sure you end up with the income you need to finally investment in that beach hut (….or shed).
