Often we find that traders are not particularly interested in using pension schemes to invest for their retirement and many would rather remain as liquid as possible in order to fund either current trading activities or to cover any particular lean periods that they may have.
However, the fact remains that under current pension legislation any monies invested into an approved pension plan will grow free of tax with up to 25% available tax-free as a lump sum after the age of 55. In addition, most personal contributions to pension schemes will receive at least basic rate tax relief at source meaning for every £100 invested in the pension scheme only £80 need actually be paid in, so you will be immediately 25% better off! If you are earning over £150,000 then the rate of tax relief may be restricted in the current tax year, although all individuals should still be able to make up to £20,000 as a gross contribution without any restriction in their tax relief, and in the case of higher rate earners, this could reduce your tax bill by £6,000. (Of course, next year, as you will see from this other article A Clearer Future Pension Regime, pension contributions of up to £50,000 can be made without penalty).
The historical view of pension funds for many people is that you effectively hand over your cash to someone who will manage that fund for you. However, this is not true for many pension funds now, particularly those that are Self-Invested Pension Plans (SIPP's). In a SIPP, as the name suggests you are in control of how your money is invested and in some SIPP’s, you may even be able to effectively trade with that money on a daily basis, albeit on a largely unleveraged basis due to the borrowing restrictions.
If of course you do not wish to trade with your pension funds, it can still be invested in numerous ways through either fund manages as described above or through numerous forms of investment such as stocks and shares, bonds, and even commercial property and thus can form a part of your overall investment portfolio in a very tax efficient way.
However, if you do not wish to invest into a pension at all or you wish to make disallowable investments (e.g. residential property), there are other tax efficient methods open to you, and this will be discussed further in another article in the near future.
If you would like to be introduced to an Independent Financial Adviser in order to discuss your pension options, then please contact one of our advisors.
Other articles you may find useful...