As bookkeepers for tradespeople, our clients often ask us about planning for pensions and retirement. While we cannot advise on this, we are fortunate to have professional contacts in our little black book we can call upon! In this week’s article, we’ve pulled in Josh Farrow, a financial adviser at Cathedral Wealth Management Ltd, to share information about pension contributions as a tradesperson. Read on to discover more.
Pension Contributions as a Tradesperson: The need to know!
Introducing Josh Farrow:
Hello, everyone. My name is Josh Farrow. I am a financial adviser at Cathedral Wealth Management Ltd. with years of experience in the industry. My role is to guide clients through the complex landscape of personal and business finance. My expertise lies in helping individuals and businesses optimise their financial strategies, focusing on tax efficiency and long-term goal achievement.
Over the years, I’ve honed my skills in tax planning, investment management, retirement planning, and estate planning. This broad knowledge base allows me to take a holistic approach to each client’s financial situation, ensuring that all aspects of their financial life work harmoniously.
My role is to be a trusted partner in my clients’ financial journeys, providing expert guidance, personalised strategies, and peace of mind as they work towards their financial goals.
General Understanding of Pensions:
Q: Firstly, what are the different types of pension schemes available to tradespeople, such as personal or workplace pensions?
JF: There are a few pensions available for those employed, and they will be in their auto-enrolment pension arrangement. Those who are self-employed or directors of their business can consider personal pensions.
How do pension contributions work for self-employed tradespeople versus those employed by a company?
JF: The mechanics are very similar for contributions into a pension scheme. Your rate of tax relief is taken at source at a basic rate. Those who are higher or additional rate taxpayers reclaim the additional via self-assessment. If a director owner makes business pension contributions, this is a trading receipt and a tax-deductible expense for the business; the business owner cannot claim tax relief on these payments.
Q: What are the key benefits of starting a pension plan early as a tradesperson?
JF: Like anything, the sooner you start the pension, the greater the opportunities for a larger pension pot in retirement, thanks to compound interest. However, the retirement income you require drives the size of the pension you need.
Contribution Details
Q: What is the recommended percentage of income tradespeople should contribute to their pension?
JF: That is very difficult to give an exact value as many factors will impact how much income you will need from your pension in retirement. One should save as much as is affordable to maximise opportunity. The best way to achieve this is with the support of a financial adviser
Q: Are there any minimum or maximum contribution limits that tradespeople should know?
JF: Under current tax laws, the maximum is £60,000 or 100% of pensionable earnings. A director or business owner can contribute £60,000 to a business even if their PAYE earnings are less than £60,000.
Challenges for Tradespeople
Q: What are the common challenges or misconceptions tradespeople face regarding pension planning?
JF: There’s the old expression, “Cash is King,” and cash flow is incredibly important. While property offers me a greater return on my investment, this is not strictly true due to the tax implications.
Q: How can tradespeople balance irregular incomes with consistent pension contributions?
JF: Affordability is crucial here. We have an allowance of £60,000 pa or 100% of pensionable earnings. This can be a lump sum, monthly regular, or a blend of both. With tradespeople, a blend of affordable regulars with ad hoc lump sums before tax year end on 5th April allows cashflow management.
Q: Are there specific considerations for tradespeople who operate as limited companies versus sole traders?
JF: We must ensure limited companies meet the wholly and exclusively ruling. An accountant confirms this but effectively states that these profits are from conducting trade.
Flexibility and Portability:
Q: How flexible are pension schemes if a tradesperson switches from self-employed to employed or vice versa?
JF: Pensions are an investment in the individual, so whether someone moves from sole trader to director owner, the asset is always theirs.
Q: Can tradespeople access their pension early in case of financial hardship?
JF: No, individuals can only access the scheme at 55 (currently). However, the age will increase to 57 in 2028. Hence, people should seek advice on affordability.
Government Schemes and Regulations
Q: Are there any government schemes or incentives aimed at helping tradespeople save for retirement?
JF: Pensions are the main source of income for saving for retirement. However, investments such as ISAs and investment bonds can be considered part of retirement planning as these offer different tax implications. Your pension is your most tax-efficient savings pot for retirement.
Q: How does auto-enrolment apply to tradespeople who employ others or run small businesses?
JF: Any business owner who has paid employees who meet the minimum earnings threshold is legally obligated to open a scheme and fund it accordingly. Some providers will support business owners with compliance regarding new employees and those leaving the scheme. This is often very time-consuming for the business owner, so it can offer great benefits.
Future Planning and Benefits
Q: How can tradespeople estimate how much they’ll need in retirement, and what planning tools are available?
JF: This is where the role of a financial adviser really comes into play. Our role is to determine what retirement looks like to that individual, ascertain all their current assets, income, and expenses, and project those into the future. After that, we can advise the individual of the exact steps needed to help ensure their vision of the future is attained through cash flow analysis forecasting.
Q: What are the risks of not contributing to a pension, and what alternatives should tradespeople consider?
JF: Firstly, if someone doesn’t fund a pension, there is no tax planning strategy; this would indicate that this individual is likely to pay unnecessary taxes. However, a financial adviser can share the tax savings available through proper financial planning whenever someone is preparing for retirement, and pension should be considered as part of a varied strategy that could include ISA funding, bonds and even property portfolios, as all will have their pros and cons but provide value during retirement.
Q: How does investing in a pension compare to other savings or investment options, like ISAs or property?
JF: Firstly, with pensions, you get tax reclamation from the government at source and via self-assessment. So, for a higher rate taxpayer, £100 into a pension costs that individual £60, which is 40% growth at the outset before considering market returns. You can attain 25% of the pension fund tax-free in the future, capped at £268,275. The remainder of the fund will be taxed at marginal income tax rates.
Please note anything above the basic rate of tax must be claimed via the individuals tax return.
Regarding ISAs, where contributions are made by taxed income, all growth and future withdrawals are entirely tax-free under current tax laws. Property is liable to tax on all income after allowable expenses, upon sale of these assets in the future these can be liable to Capital Gains Tax. Each has their own tax position, and this is why planning is crucial.
Practical Advice
Q: What is the first step a tradesperson should take if they want to start or review their pension plan?
JF: The first stage is always to contact a financial adviser to review their current arrangements and consider affordability both now and in the future. You attain the most value when your retirement plan considers these factors.
Q: Are there any common pitfalls or mistakes tradespeople should avoid when setting up a pension?
JF: Importantly, use the services of a financial professional. They will ensure they set the scheme up correctly the first time around and the pension funding is affordable. For business owners with staff, advisers can guide you to providers who will support pension compliance, which can be of real value.
Q: Finally, what resources or advisers should tradespeople consult to ensure they make the best pension decisions?
JF: I would undoubtedly say a financial adviser, their accountant, and if the business is large enough and has a Finance Director (FD), include these. All these parties can ensure affordability and the right asset makeup to meet your objectives.
We hope you’ve found this article valuable. Thank you to Josh Farrow for all his help. Stay tuned to our knowledge hub for regular advice on running your business and planning financially.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Cathedral Wealth Management Ltd is an Appointed Representative of and represents only
St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website http://www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.