Client briefing note: do I need a pension scheme?
A pension is a "tax advantaged" method of saving for retirement. This means that:
- You receive tax relief when you make contributions into a tax approved scheme.
- There is no tax or National Insurance contributions (NICs) charged when an employer makes contributions on your behalf.
- From 2011/12 there will be a restriction on tax relief for high earners, there is a new consultation as to how this will work in practice..
- Pension funds are not subject to tax and so your income grows within your fund tax-free.
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Once you retire, your pension will provide you with an income that is taxable. You may also face some restrictions on what part of your pension pot can be passed on to your family.
From 2009/10 to 2010/11 there is a restriction on the amount of tax relief that those who have an income in excess of £130,000 can receive on their pension contibutions if contributions are made on an irregular basis. Regular contributions are unaffected.
From 2011/12 tax relief is due to be restricted on contributions made by individuals or their employers if annual income (referred to a relevant income) exceeds £130,000. Where an individual has a defined benefit scheme there may be a tax charge based on the value of annual growth within the scheme.
Pension schemes can be expensive to administer; but personal pension schemes may benefit from low charges. Self Invested Pension Plans (SIPPs) are an alternative option: you select your own investments.
Companies can also set up their own schemes. These can be approved schemes which means that they qualify with HMRC's requirements, and are tax advantaged. However, unapproved schemes can also be an interesting alternative in remuneration planning.
- Pensions: tax rules & planning: This provides an up-date on the current rules, and what changes have so far been proposed for 2011/12. This includes detailed worked examples and a step by step guide to help work through the proposed claw back of tax relief.
- Pensions: planning for directors: This guide explains how the 2011/12 rules may affect directors and will interact with other benefits and incentive schemes. This includes worked examples to show how to make a pension contribution in specie, and advice on how to work within the pension restriction anti-forestalling rules.
For more tax planning guides for directors see Tax planning for directors which has a summary of the lastest tax guides & checklists which cover this topic area.
