Are pensions coming back in to fashion?

Friday, January 06, 2017

What goes around comes around.

Do you remember the time when people valued pensions? As we enter 2017, it may just be that pensions are ready to return to the limelight.

The last few years have been a bit difficult for pensions. Interest rate reductions mean that the income provided by pensions through annuities were perceived as poor value and continued legislative changes made them more and more complicated. Further to that, flexible employment meant that many people simply decided to look elsewhere for their income in retirement, either through simply investing in different assets such as property, or different vehicles such as ISAs.

But the recent announcement in the Budget Statement confirming that many Salary Sacrifice arrangements are going to be taxed as if they were income means that the humble pension plan is starting to rise to the top of the pile again. So many of the things that pushed their way in front of pensions are now being taxed more heavily than before. Then add in the new pension Freedom rules that make pension planning and distribution of the income more flexible than ever and you begin to see why its time to be positive about pensions.

And for Company Directors, the need to consider pensions is even more pressing.

The Salary Sacrifice changes that will come about from April 2017 already put pressure on a Director remuneration package that is now also being hit by Dividend Taxation for the very first time. This was introduced in April 2016 and has made Dividends much less attractive (although still better value than taking the money as income). The combination of these two new pieces of legislation means that a Company pension contribution, which is deemed as a Business Expense, so reducing their Corporation Tax bill, is now starting to look very attractive.

It becomes even more attractive when it is paid to the partner of the key Director of the business, which in many cases is the wife. Many Company Directors will employ their wife as a Director of the same business, yet she will often have overall pension benefits that are much lower than her husband. This becomes an issue at retirement, when the wife will still have a personal allowance that is often not being utilized due to her limited pension benefits. Using Company pension contributions to ‘equalise’ the pension pots can provide Corporation Tax relief now and provide an excellent income tax planning tool at retirement.

It is this sort of flexibility that is starting to make pensions much more interesting again. With Dividends becoming less attractive and pressure being put on Salary Sacrifice, perhaps the humble pension is heading back to the top of the pile again.

If you would like to find out more, please do not hesitate to get in touch.