Pensions are a useful source of funds for business owners. As Pension Freedoms have allowed greater flexibility in terms of access to pension funds it allows us to use them in circumstances that previously we would not have been able. For many people their second biggest asset behind the house is their pension funds. In previous times a business owner would have looked at possibly re-mortgaging their home as a source of funds but for those over 55, accessing their pension could be a viable alternative.
If we take the example of Neil Clifford who owns a printing company. He needs to invest in some new printing machines to allow his business to continue to grow. He needs £70,000 to update machinery and the company has £20,000 cash in the bank. He is reluctant to take out a loan and wants his adviser to suggest some alternatives. Crucially Neil is just about to turn 55 allowing him access to personal pension fund which is now valued at £300,000. He is currently contributing £500 per month and has been for several years through the business and wishes to continue to contribute into his pension and would in fact like to increase his contributions into his pension going forward.
We would recommend that the client accesses their entire tax free cash of £75,000 (25% of £300,000). £70,000 would be used to fund the updated machinery and the rest of the money would be used to fund the increased pension contributions. To stop individuals taking the tax-free cash from their pension and then re-investing back into their pension to effectively get tax relief twice on the same pension contributions there are strict rules around this (see diagram below). To stop Neil falling foul of tax-free cash recycling rules we can increase his contributions by 30% of his current levels. As we have £5000 left over from his tax-free cash we can add this to his pension as a lump sum (this is best paid for from the company to be free of corporation tax) and as the 30% calculation is spread over three tax years this would not cause any problems. Neil would only be able to contribute an additional £400 spread over the current tax year and the next two following after.
This has resulted in Neil having paid for something from his pension that would have benefited from not being subject to corporation tax on entry and not being subject to income tax on the way out. Neil has also benefited from a pension contribution from recycled tax-free cash. Any contributions made to his pension after the tax-free cash is taken will result in further funds being built up with a tax-free cash element.
If you want to know other ways that your pension can work for your business or for any financial advice Bradbury Hamilton, are able to advise. You should also read our article on why it is even more important to seek financial planning advice on pensions considering the changes to allow people to access their pensions earlier.
For more information, contact our Partner Paul Dell at email@example.com.