A number of changes relating to pension rules are happening. Here are some key dates, planning points and opportunities.
NEST (National Employment Savings Trust)
All employers will have to pay up to 3% of salary into their employees’ pension funds (in other words, another stealth tax/NI charge…). This is being phased in over several years. For employers with up to 250 people, the proposed dates are from 1 April 2014 to 1 February 2018. Full details are here.
But you may want to take advice and act now. For example, if you have employees paying higher rate tax (i.e. total income of over about £42k), they won’t get higher rate tax relief with NEST. That means they need to set up other pension arrangements, and this should be done before 31 December 2012 to minimise set-up costs.
Many employers are planning to reduce pay rises to compensate for this extra cost, so you may want to re-set your employees’ expectations about pay rises well in advance!
Limited companies can pay up £50k a year into pensions for each of their directors, as long as you can justify to the taxman that the director’s services are worth that much (usually very easy to do). You can also use up the previous three years’ allowance, making a total of £200k. Note that a pension scheme must be in place during that three-year period, even if it is dormant, to do this. If in future you might want to pay in more than £50k a year and you don’t have any pension scheme at present, you should set one up now so you can benefit from the three-year rule later.
At present, owners of limited companies can also make pension contributions of up to £50k each for family member. But this is an unintended loophole that HMRC is closing on 6 April 2013.
Baby booming investments
However, if you want to pay into pensions for family members yourself (rather than through your company), even after 6 April 2012 you can put up to £2,880 a year in for each of them, and HMRC adds tax relief to this to make the total contribution up to £3,600 (even if it’s for a child under 18 who doesn’t pay tax).
If you start a pension like this for a newborn baby and if the pension grows at 5% a year, it will be worth over £1 million by the time the child is 60. If the growth is 10%, then it will be worth over £10 million by age 60!
How much do you need to save anyway?
I have just had a retirement forecast done to see when (and if…) I can retire and how much I need to save and draw out of K&H. I would encourage everyone to do this, so that you can see how much you need to save and/or what business succession plans you need. This is great information to have as you can use it as the basis of all your business plans and targets. If you’d like to know more I can put you in touch with a financial planner who specialises in this.
Let me know if you have any queries on any of this or if I can help in any way.