Jane and Karl run a successful, second generation family business. They were looking ahead towards their own retirement (perhaps in 6-7 years’ time), are keen to ensure the business continues and have plans for younger family members to eventually take over the running of the company.
The company makes good profits, but they were reluctant to take additional salary or dividends due to their tax positions.
They understand the valuable tax breaks of company pension contributions, but Karl has previously applied for Fixed Protection in relation to his Lifetime Allowance (LTA), as his pension benefits (held within an existing Small Self-Administered Scheme – SSAS) are valued at over £2million and exceed the standard limit. He would lose this protection if any more pension contributions are made for him. Karl also felt his pension fund would benefit from a more cohesive investment approach (please also see “Investing existing company pension funds” Case Study).
Jane had very little pension provision compared to Karl.
How could they plan effectively to secure their own future and that of their children?
- To fund large company pension contributions for Jane, as she had little pension provision in her own name.
- To start making smaller company pension contributions for the next generation, with the intention of increasing these payments once Jane and Karl step back from the business.
- To implement a suitable investment strategy for their pension funds, to take into account each members’ differing timescales and objectives.
What we did
- Pension contributions for Jane – As Jane had been a member of the company pension scheme for a number of years, we calculated that up to £136,000 could be paid by the company as a pension contribution for her before the end of the 2017/18 tax-year (a £90,000 contribution was actually made). This used up her Annual Allowance, plus previously unused allowances from previous tax-years.
- Similar contributions were made each tax year for Jane, until all previously unused allowances had been fully utilised.
- Younger family members were joined into the company pension scheme and smaller contributions were made, commensurate with their roles.
- We recommended a consistent investment strategy for the pension funds, with suitable levels of risk, taking into account the different timescale and objectives for each member.
What were the benefits
- The company has received around £50,000 of Corporation Tax relief against profits for the pension contributions made for Jane and the younger members since we started to advise them.
- Jane’s pension fund has received around £250,000 in additional contributions from the company over the last four tax years. This will ensure their joint retirement income is spread more evenly between them and has helped them build wealth in a very tax efficient way.
- Jane and Karl’s reliance on the company for their future financial wellbeing has been reduced, as the pension fund is ‘ring-fenced’ from their business.
- Value has been extracted from the company with no personal tax implications for Jane.
- They now have a simple, consistent approach to investing their pension funds to grow, with a level of risk they are comfortable with, until they need to start drawing on them.
