The aim of a director's pension is to build up a sum of money in a tax-efficient way that will be used to provide you with an income when you retire.
Directors can use occupational schemes, stakeholder and personal pensions, but also have other alternatives such as small self-administered scheme available.
You can usually take up to 25% of it as a tax-free lump sum when you take your benefits (depending on your pension scheme rules). The remainder of your benefits will be paid subject to income tax.
Small Self-Administered Scheme (SSAS)
Small Self Administered Schemes (SSAS) are suitable for the controlling directors of companies, which make it ideal for most small limited companies where the shares are mainly or wholly owned by working directors.
What is a Small Self-Administered Scheme?
A SSAS is an occupational pension scheme that offers its members flexibility and control over the investment policy and underlying assets. It is a pension scheme set up under trust with fewer than 12 members.
The assets of a SSAS do not belong to any particular member of the scheme due to the collective nature of the trust. The members, as trustees, will jointly control the scheme and its investments.
Tax relief is given against Corporation Tax for company contributions, and personal Income Tax for any personal contributions.
Small Self-Administrated Schemes are regulated by the Pensions Regulator.
Advantages of a Director's Pension
Using a pension scheme can be a far more sensible strategy than relying on your business to provide income to fund your retirement. You can receive tax relief at your highest rate on any personal contributions and your company contributions do not incur income tax or national insurance, unlike other benefits. A pension can be a way of extracting business profits in a tax-efficient manner; for the benefit of a director or business owner.
Your pension fund will grow free from most taxation, provide a tax-free lump sum and an income after that, once you decide to retire or take the benefits.
Employer contributions can be considered a 'business expense' and therefore deductible as an expense for the calculation of Corporation Tax.
Having a pension remains one of the most tax-efficient ways for business owners and company directors to accumulate wealth for retirement.
For many business owners, their business is their pension, which is why it is important to have an exit strategy in place when you retire.
As the rules currently stand you may be able to carry forward any unused annual allowance from the previous three years. This will allow you to make one-off contribution to your pension.
A pension is a long term investment, the fund may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The Financial Conduct Authority does not regulate occupational pensions.