Retirement Webinar: Pensions for Business Owners
Hello and welcome to the session on pensions for business owners, my name's Eoin and I work in the financial wellbeing team within Hargreaves Lansdown and during the course of the next 20 minutes or so we'll be discussing some of the elements of pensions personal pensions and how they may well assist people who have their own businesses. So none of the information that I'll be giving should be construed offers financial advice, really it's just trying to put you in the best position possible when you're trying to decide how to make provisions for your future. If you feel that you do need specific advice then that is a separate service offered by Hargreaves Lansdown so do get in touch with our help desk to find out more So the presentation itself will be going into various examples of how pensions work and how tax relief works. So undoubtedly they're not going to apply to everybody and everybody's circumstances but really it's it's just designed to give you a bit more understanding of how a pension can help get you to to the point at which you you possibly want to retire and generate that income in retirement that you think you may need to sustain your lifestyle in the future So retirement is is a funny one, everybody is different in terms of what it is they want to be doing in retirement and not everybody will look to have the same retirements so there's there's quite a few studies that have been done into retirement and levels of income that on average people will need to live certain kinds of lifestyle and also looking at the kinds of pension pots that that on average people have at various points throughout their lives. So it's the case that a couple of years ago 16% of self-employed people are contributing into a private pension, in the late uh 1990s that was more like 48% so we've seen a big drop in the amount of self-employed people that are actually contributing towards a pension for their future.
On average private pension values tend to be at their highest at some point in people's late 60s early 70s around about 206 000 pounds is a sort of fairly average personal pension pot at that point and it's estimated that in order to live a moderate standard of lifestyle in retirement if you're in a couple you'd need just over 29 000 pounds a year and we'll go into a bit more detail on on what moderate means and other kinds of lifestyle that people want may want in retirement and the kinds of income that it's thought that people should be trying to secure So where's your income going to come from when you are retired. The first source of income for many people will be the state pension and the state pension is what you receive for paying national insurance contributions throughout the course of your your working life and in order to receive the full state pension you need to have paid national insurance contributions for 35 years across your life and if you do that then the amount you'll receive from the state will be 9 340 pounds a year in today's terms so that's the state pension as it is for the current tax year although things are subject to to change. However the age at which that state pension kicks in has recently gone through a process of increasing and it did used to be the case that the state pension kicked in at 60 for women and 65 for men however they've equalized the women's state pension age in line with men at 65 and then over the last few years have been pushing that up to 66 and then it's moving up again to 67 and then for anybody born after April 1978 state pension age is due to rise further up to 68. So whilst just over nine thousand pounds a year isn't a bad amount of money in itself it will probably go a long way to covering most people's basic bills and living costs. If it's not going to kick in until your late 60s many people will have wanted to have had some form of retirement a reduction in working hours or or full retirement potentially before that state pension age so it is really important to have your own pension provisions to give you a bit of flexibility about firstly when you retire but then also the kind of lifestyle that you will lead in retirement. So a pension works in a way that you pay money into it and money that you pay in benefits from tax relief or a tax saving so that's the government's incentive to get people saving for the future is they give you the tax back on money that's paid into a pension, subject to certain limits. And then once that money is in your pension pot
you can choose how that gets invested and the investment side of things is really important. It may not be something that people have necessarily considered before but trying to get the best investment growth you possibly can is really important because those two things together how much you pay in and how well your investment performs they combine to build that pot of money up and it's that pot of money which will then sustain you hopefully in retirement. The earliest point that you can access that pot is from 55 onwards although that is being linked to the state pension age. So 10 years before state pension age is the earliest point you'll be able to access the money in the future so we'll go up to 57 and ultimately 58 our state pension age rises on an ongoing basis whatever you've built up in your pots you can withdraw 25 percent of that as a lump sum tax-free and then the balance is yours to generate your pension income so the bigger the pots bigger the lump sum you have and the bigger the income in retirement So I've already mentioned a couple trying to live a moderate standard of lifestyle in retirement would need an income of about 29,000 pounds a year between them this is based on information and research done by the pension and lifetime savings association. Year before last when they looked into retirement and tried to come up with some of the the more standard costs and outgoings that people would would incur and then look at some of the slightly more luxury things that people might like to do and they then categorized retirement into three different areas. The minimum standard
of lifestyle a moderate standard lifestyle and a comfortable land a standard of lifestyle. So in order to achieve a minimum standard of lifestyle if you're an individual in retirement you need an income of just over ten thousand pounds a year or between two and a couple, fifteen thousand seven hundred pounds a year. So for people in that situation the state pension is likely to go most of the way to making up your income and really as the name suggests that is the the minimum required to pay your bills, shopping and get by really in retirement. The moderate standard of lifestyle which we assume most people are probably trying to target uh requires an individual to have an income just over 20 000 pounds a year and again a couple an income of 29 000 pounds a year so the state pension will again go some way to covering covering that but then that does then leave a bit of a gap to for individuals to try and save a bit more themselves into personal pensions to try and top that that amount up and the moderate standard of lifestyle would give you the ability to uh go abroad for for two weeks each year eat out once or twice a month, so you'd still be able to do some of the slightly more interesting things that you might have done whilst you're working and as well as paying your bills.
The really comfortable standard of lifestyle would require an individual to have about thirty three thousand pounds a year as a retirement income and between two in a couple forty seven and a half thousand pounds a year and this would then be for somebody who's looking to renew their car every couple of years spend a longer period of time on holiday potentially abroad have a more expensive weekly food shop some of those things which aren't a necessity as such but but maybe things that you have depending on your personal preferences. So in order to retire then in London, so if it were the case that you you lived in London and had worked your life in London and wanted to retire there then it's likely that you would actually need slightly more due to things being slightly more expensive. These figures normally assume that you've got somewhere to live that you don't then have to pay for in retirement and so often people's costs do dip when they come to retire but it's still still a good idea to have a really good level of income or the best level of income that you possibly can So for somebody who we're looking to build up that moderate standard of income in retirement we then worked back and it suggested that in order to to get a pot big enough to give you the moderate standard of lifestyle in retirement you need to contribute about 12% a year of your salary over a 50-year period. So starting work at 18 and finishing work
at 68 so a really long period of time many people possibly won't be working that long so for every three years less that you don't want to work or you haven't worked you need to contribute an extra percent into your pension so if you only wanted to work for 42 years which is possibly a bit more average then you'd need to contribute around 15% of your salary into your pension so that gives you an idea of the kind of contribution required over a long period of time to build up a pension pot capable of giving you a good level of income and retirement So how do those contributions get made for people with their own business it will depend on on how you're set up. If you're a sole trader then you're contributing any contributions you make individually are are net so it's via relief at source and I'll explain a bit more in a moment but really what it means is when you put money into the pension it then benefits from tax relief at whatever your marginal rate of income tax is. If you're a director of your own company then you can make contributions from your salary that you're paid by the company and that could be done via salary sacrifice, saving tax and national insurance but you can also pay contributions in from the company directly which then the tax benefit is is for the company and may may save corporation tax so it depends how you set up as a business but there are ways of getting money into the pension that are tax efficient. So the relief at source method which I mentioned firstly for for sole traders you would have been paid your income whatever it is which has had tax and national insurance taken from it, you could then pay that into a pension pot and at the point you do that the pension provider will claim basic rate tax relief on your behalf if you're a higher or additional rate taxpayer you then have to claim any higher or additional rate tax back from HMRC. Typically done via a self-assessment tax form but if you don't do one
of those then you can write to HMRC and notify them that you've made a pension contribution when contributions are made via salary sacrifice or salary exchanges, the other term simply the the money is deducted by the company rather than being paid to you and as a result it doesn't have any tax or individual tax on national insurance taken from it. You can then pay that money into the pension so there's nothing further for you to reclaim because it's not had any tax taken from it in the first place and crucially the the national insurance saving is also made as well Because of those generous tax benefits, the fact that you you can receive tax relief at whatever your your marginal rate of income taxes and then potentially national insurance as well, there are limits on how much you can pay into the pension and benefit from tax savings on. So you can't pay in more than you earn across the course of a tax here and there's that's then subject to an annual allowance which is 40 thousand pounds for the majority of people if you're classed as a high earner by the government, so if you have adjusted income in excess of two hundred forty thousand pounds or more then the amount you can pay into the pension starts to reduce. So do let us know if that's the case you can then also look at previous tax years and carry forward unused allowances into the current tax year to enable you to to make a higher level of contribution and pension pots that you build up are then subject to a lifetime allowance of a million and seventy three thousand one hundred pounds which is the total figure that you can build up in your pensions. Anything over that you then start to pay a punitive rate of tax when you come to draw it out so these figures are subject to change so they're all appropriate for the current tax year but to keep an eye on the budget in future years to see if any changes get made to how much you can pay into your pension. So the kind of pension that is available through Hargreaves Lansdown is known as a SIPP or self-invested personal pension and again this allows you to make contributions into it and receive tax relief for whatever your marginal rate of taxes and we're a really big well-established company with with a long record of providing personal pensions, with a a help desk on hand to assist in making decisions. Be that how much you're paying in, how it works, how you then
decide for the money to be invested. We don't provide specific advice so it is still then up to you to make a decision and whilst the help desk and various sources of information on the website will give you loads of detail it's still then up to you to decide what it is you actually want to do but there is there is a lot of assistance from us regarding selecting investments so even if you haven't previously been involved in that side of things with pensions before please don't let it put you off and think that it might not be for you because there is so much assistance available. So when that money goes into the the pension pot, getting the best level of investment growth you possibly can is key and sounds quite straightforward but the higher level of growth you receive will result in you having a bigger pot in the future. So in this slide somebody starting off with 30 000 pounds in their pots if they invested that for 30 years and it grew at 1 each year they'd have just over 40 000 pounds in thirty years time, if they grow at four percent each year they'd have just over ninety seven thousand pounds, and growing at seven percent each year they'd have two hundred and twenty eight thousand pounds. So just a couple of percent better growth each year compounded over a really long period of time gives a much bigger pension pot, but in order to achieve growth rates at those higher levels you may find yourself needing to consider investments which have a higher level of risk associated with them and risk is really the chance of that money fluctuating in value for the period of time it's invested for. So different investments perform in very different ways and this line shows how cash
has performed over the last 25 years so cash is seen as a relatively secure way of investing your money it's it doesn't dip in value but when held for a long period of time cash may not keep pace with inflation, and inflation being the rise in the cost of everyday goods and services and that's certainly what we've seen over the last 25 years, somebody who put cash in the bank 25 years ago if they took it out today and tried to buy the same amount of things they were able to 25 years ago they wouldn't be able to, so prices have gone up quicker than interest rates on cash. This line shows how gilts have performed and gilts are loans to the UK government, so by lending your money to the government you're taking on a bit more risk than holding it in cash but they are traded investments and they go up and down in value. The UK government is seen as quite a secure borrower so it's it's still not necessarily seen as a highly risky investment but there is more risk associated with cash and as a result you would hope the return over the long term would be higher and this line illustrates an investment into the UK stock market or shares, and shares over that long period of time have comfortably outperformed the other kinds of of assets but you'll notice that they're characterized by big dips along the way, most noticeably this time last year where the global lockdown started and there was a big dip in the value of of shares. The value of companies the recovery over the course of the following year has been relatively strong so broadly they're back up to where they were this time last year um but often the level of risk that people will take is again quite a personal thing and it's something that only you will know what's right for you So with with a pension again a common way of getting your money invested is by giving it to a fund manager and it's that manager's job to then choose the kinds of investments your money goes into, so you're not necessarily having to choose individual companies or guilts or bonds or whatever it might be. You're instead choosing a fund manager who will then manage the money in a certain way and different fund managers specialise in different things.
Some will specialize in buying shares of American companies or UK companies or big global companies, others will take a mixed approach and invest into things like shares as well as bonds and all cash too so trying to pick a fund manager who suits your own attitude to risk and your own aims is really important and that's where Hargreaves Lansdown do a lot of research and offer a lot of information to try and help people in making those kinds of decisions. So there's about 3000 different funds that are available. Different fund managers, they will cover a whole range of different things so if you're really interested in investing or investment themes and there's something that particularly interests you or excites you, then chances are there'll be a fund who who's fund manager buys companies that operate in that area. But from all those different funds we've condensed who we feel to be the best funds and fund managers in the major sectors down into a list called the wealth shortlist, and these are funds that our research team think have the ability to outperform over long periods of time and we're keeping a constant eye on these funds and fund managers and there's a level of governance from us so that if we feel that they're not performing and you've chosen one of those funds then then you get notified. So there's always assistance from us on an ongoing basis from that that short list we then condense it further down into ready-made portfolios which will be based on the attitude to risk you feel that you're comfortable in taking whether or not you're happy being adventurous or medium risk or conservative somewhere a bit lower down the risk scale and what our team have done here is rather than giving you a load of funds, they suggest five or six different funds which might suit a certain type of investor. It is then just a framework for you to go off so if you look at look at a portfolio and think you don't like the look of one fund or a couple of funds and want to add your own in that's absolutely fine. It's not specific investment
advice it's really just giving you an idea of how we think a good portfolio can be constructed from the the funds that we're particularly keen on. Alongside funds it is also possible to use your SIPP with Hargreaves Lansdown to invest in individual company shares so if you want to, to buy listed investments on a recognized stock exchange then you're able to do that. So there's a whole range of other investments for those people looking to be much more hands-on So I mentioned the master portfolios. This is just an example of what they look like, so you would select the level of risk you're happy taking, enter the size of pension pot you've got built up, the lump sum or the amount you're paying in monthly on an ongoing basis and it then gives you an idea of the different fund managers and the funds that they operate. Whenever you see a fund highlighted in blue if you click on that name of the fund it will take you to the fund fact sheet so that you can find out a bit more about how the fund is run, why we like it, what they're investing into and crucially how they've performed over the last five five years. As well on the right hand side of the page you can then see the suggested split and this is where you can tailor it further to your own uh your own views if you were particularly keen on an area or a sector and you wanted to invest more into that and less into something else then you can just tailor that to to your own views Also having one eye on how you actually access your pension is really important too. Not all
pension providers will offer a full range of services when it comes to retirement and broadly speaking when you do come to retirement the different ways in which you access your money are via an annuity, which involves you transferring your pension pot to an insurance company who will then give you a guaranteed level of income for life and the ability to take up to 25% of the pot as a lump sum tax free at the start the annuity then gives you that security knowing that whatever the income is that's set up will then just pay to you for the rest of your life you can elect to have the annuity paying to a spouse or a financial dependent as well you can also build in things like inflation linking so it increases each year in line with a measure of inflation often the more things you build in the lower the income you'll receive to start with but it's it's important to get it right for you because once an annuity is set up you can't then subsequently make changes to it and if you have any medical conditions then uh anything that might be seen to shorten your average life expectancy the annuity company will actually pay you more to begin with because they they might assume that you're not going to be receiving the annuity payment for for as long as as average so it's really important if you decide to go down the annuity you really explore that uh very well and Hargreaves Lansdown are one of the largest annuity brokers in the UK so we can certainly assist with that the other two methods draw down or uncrystallized fund pension lump sum or off plus withdrawal are both something that Hargreaves Lansdown provide directly drawdown gives you the ability to keep your money invested and you then withdraw an income from that again at the point you enter into drawdown you can take 25 percent of the pot tax free as a lump sum anything further that you then withdraw is subject to income tax at marginal rates where the money is still invested it has the ability to grow over the long term and ultimately you may get back more than you've you've put in but also that is one of the risks withdraw down that if your investment isn't growing in value each year and you then still want to take money out from it your pot might diminish at a much quicker rate and you may run out of money before you pass away young crystallized fun pension lump sum it allows you to rather than moving all the money into drawdown on a one-off basis you can just take chunks out of the pot and each time you do that 25 is tax-free the rest taxed as income so both those methods are known as flexibly accessing your pots at the point you do that if you were to flexibly access your pot the amount you can pay into the pension going forwards is capped at four thousand pounds each year that's known as the money purchase annual allowance so that's uh how your pension would work in retirement if you decide to save outside of a pension um then there are other accounts which still give you the ability to hopefully benefit from rising stock markets over time and choosing your own investments so with Hargreaves Lansdown we operate a normal fund and share account which gives you the ability to buy and sell investments with no particular tax advantages there's a cash ISA which gives you the chance to hold cash and receive a rate of interest and on the interest any cash held within a cash ISA you don't pay any further taxes on the interest and that's the same with stocks and shares ISA so investments within a stocks and shares ISA if they grow in value you'll then exempt from having to pay any further taxes on those be it capital gains tax or taxes on any any dividends there's also then a product known as innovative innovative finance ISA. Hargreaves Lansdown operate a Lifetime ISA and there's also a product called Active Savings which again is a way of getting cash invested and making sure that you're getting the best rate of interest possible on those cash savings so the Lifetime ISA is one which is is a particularly interesting one so it's available to anybody between the age of 18 and 39 and you can pay in up to four thousand pounds each tax year and receive an uplift from the government of 25% of whatever it is you pay in up to four thousand pounds so if you paid the full four thousand you get a thousand pounds from the government paid into the accounts that money is then invested so you can choose to again invest that and hopefully over time grow the investments and when it's within the the ISA it's uh the investment growth is exempt from from any capital gains tax in the future that money can then be used for for a range of different things so if you're looking to purchase a first-time property um then you can withdraw the money and you don't have to pay any penalty on it there's no tax charge to go back to the government alternatively if you're not using it to save for a first time property the money can remain in there until the age of 60 and if it remains in there until the age of 60 then when you come to access it after 60 you don't pay again any penalty on it if you decide to access the money before the age of 60 uh not to buy a first-time property then you would pay a 25% penalty back to the government so it does give you a bit of flexibility if if you're thinking of putting money away for the future but you're concerned about the ability to to access it but the ability to access it comes with the potential of having to pay a penalty back to the government when you're weighing up whether or not a pension or a Lifetime ISA um might be better in your circumstances the the two uh whilst they offer some similarities that there are some quite big differences as well so the pension any contributions into that you get tax relief at your highest marginal rate so if you're a higher rate taxpayer you get 40% tax relief or an additional rate tax pay you get 45% tax relief and you can pay quite a bit more into the pension so subject to that annual allowance of 40 000 pounds that we spoke about earlier both accounts have a wide range of investment options when the money is in either the pension or the Lifetime ISA the investment is free from from further taxes the pension the earliest you can access the money is rising to currently 55 rising to 10 years before state pension age so going up to 57 in 2028 with the lifetime isa again as we just mentioned you can either take the money out to buy a first-time property or you keep it in there until the age of 60. with the pension when you access it whatever you come to take 25% of it is is tax-free and the rest is then available as a taxable income by one of the options we we discussed earlier the lifetime isa is after the age of 60 doesn't have any tax applied to it so you can just take it out as and when you want it and it's just a pot of money so yours to withdraw whenever um but if you are taking it before the age of 60 not to buy the first time property then you pay a 25 penalty so having your account with Hargreaves Lansdown, if you do decide to have multiple ways of saving through as a pension, Lifetime ISA, fund and share account, whatever it might be it's all operated through the one account so you would log into the one system you would then be able to see the various different accounts that you might have set up it's all monitored as well through an app which is free to download if you just look at hl in the app store and that will then give you the ability to see the pots of money that you're beginning to accumulate and we have a help desk who can provide again much more assistance and guidance around your pension and around investments they won't be able to provide advice but it's really useful especially if you're new to pensions or savings and you are just looking to find out more information about how these kinds of accounts might help you do get in touch and ultimately have a look at the website as well because there's loads of information on there which will help you make a decision So I hope you found that presentation useful um I'll leave these important investment notes on the screen for a moment and if you could just have a read through them and then I'll put the contact details up again in a moment. Great, thanks very much for listening everybody again I hope you found that useful and if you do have any questions feel free to send an email thanks very much bye.