By Ross Martin, Accountancy Director at Hive Business
We understand that thinking about the future doesn’t always fill people with excitement and when we mention the word “pension” we see their eyes glaze over, but stick with us and discover how your retirement plan could be accelerated more than you thought.
Most dental practice owners, even if they were not aware of the terminology, are aware of ‘employer-funded’ pension contributions which allow your limited company to contribute to your personal pension pot whilst obtaining a tax deduction. Traditionally it is also accepted that your pot is then managed by a usually large life company such as Standard Life, Aviva, Scottish Widows etc.
Many recent rules are tightening tax relief on pension contributions but this can still be an advantageous method for company owners compared to extracting dividends and making a personal contribution. The maximum tax efficient contribution is now only £40k (with some possible utilisation of previous years’ allowances) or only £10k if income is over £150k.
However what is much less widely known is an ‘unfunded’ contribution. Whilst still a valid pension savings method this does not immediately set aside the funds for management but is a “promise” by a company to make funds available at a later date for retirement benefits, necessarily out of the profits of the business at the time.
Those funds can then be used in the normal variety of methods (e.g. to buy an annuity) so the distinction really does just boil down to when the funds are physically expended.
Usually, a tax deduction is claimed when the payment is made in the future although, with care, the tax deduction can be taken immediately. Although ‘unfunded’ schemes are usually only found in the public-sector, the theory clearly gives some mature planning opportunities to the small-business owner in today’s environment.
Wherever you are in your career, whether you are just starting out as an associate dentist or you want to start planning your exit strategy, we can help. To discuss your retirement plan with us get in touch on 01872 300232 or email us at hello@hivebusiness.co.uk.
