Everyone knows that for most of us the real answer is right now! In
reality and with ever worsening doom and gloom from the Government it almost
seems like we are all going to need to work until we are 80. However, this
is a common question posed by financial advisers to their clients when
discussing the topic of pensions. A pension shouldn't just be viewed as a
vehicle that can be used to build a fund to produce an income that is
designed to support you in your more senior years, it should also be made to
work wherever possible.
A pension is a tax planning tool and a means of obtaining financial independence. The ability to be able to choose which days you get out of bed early and for which clients you will accept assignments makes life that much more enjoyable. After all, a photographer is likely to retain their ability to take photographs and generate creative ideas far beyond the potential retirement ages of 60 or 65 and is likely to carry on especially if they are dedicated and love their job as much as most do.
So how can you use a pension plan to your advantage?
To reduce your income tax liability
For a basic rate tax payer, for each pound invested a further 25 pence is
added by Her Majesty's Revenue and Customs (HMRC) and for a higher rate tax
payer up to a further 25 pence can also be received by way of the tax return
(special rules limiting higher rate tax relief do apply to those earning
over £150,000 though).
It is a simple choice of whether you are happy contributing to the public purse or would rather see the income you have earned be used as fully as possible for your own benefit.
Regular contributions can be added to with one off contributions when you have experienced a successful year. For example, if you estimate £10,000 of your earnings will suffer higher rate tax by investing a £10,000 single contribution into your pension no higher rate tax will be payable.
To repay your mortgage
The Government provides valuable tax breaks to encourage individuals to save
in a pension for their senior years. In order that the capital is not
squandered early into the benefit drawdown period they stipulate that 75% of
the fund must be used to generate an income. Therefore, 25% is available as
a tax free lump sum. This sum can be used for any purpose including the
repayment of a loan or mortgage. Effectively, in this scenario, the
Government could have indirectly been funding the purchase of your home.
To expand your business
Many photographers would like to purchase a commercial property to use as a
studio. Why not let the Government help? Invest in a Self Invested Personal
Pension Plan (SIPP) and then use the fund to purchase the property. The
property as an asset of your pension will be free from Capital gains Tax if
and when sold. You will pay the pension fund rent for use of the studio
reducing your taxable income. In addition your pension can sub let the
studio to other photographers who will then also contribute to your pension
The purchase of a commercial property by your pension requires you to establish sufficient capital within the fund. This can be achieved in a number of ways:
• Many clients have accumulated small pots of pension benefits from past periods of employment/self employment. These smaller funds can be consolidated into your Self Invested Pension.
• The levels of contribution that can be made are generous. Contributions can be made up to the amount you earn in each financial year.
• You can borrow 50% of the value of the fund from a lender to further enhance your purchasing power.
If you still fall short of the level required to purchase the commercial property, you can liaise with other like-minded photographers and buy a share of the property with them.
Through a SIPP it is also possible to invest in certain esoteric assets and collective investments.
The purchase of commercial property and esoteric assets and collective investments is not an aspiration for all and for these investors there is a choice of other types of plan namely a Stakeholder Pension or a Personal Pension.
This is the base level pension product rather like a value brand at the local supermarket. It was introduced with the low to middle earner in mind. It tends to have low charges but the downside is that it offers limited investment flexibility. This can result in substandard performance, as the limited range of funds is likely to preclude the client from being able to access the best funds and investment managers.
Personal Pension Plan
For those clients that are prepared to consider paying a higher charge to
obtain access to potentially better performing funds, the Personal Pension
Plan may be a more appropriate route. Personal Pension Plans can offer
access to between 100+ to 2,000+ funds depending on the provider. Over the
course of the contract, the charges on a Personal Pension Plan can compete
against a Stakeholder plan as for many providers the charges reduce as the
fund increases in size. However, if the plan is made paid up (contributions
are stopped in the early years) it can be expensive.
It is therefore important to seek Independent Financial Advice to ensure the client accesses the plan that best fits their circumstances and requirements.
These are general guides to products that are available and every individual will differ. It is important that you discuss your individual circumstances with an Independent Financial Adviser first before choosing one.
So, if you can achieve all the above and choose when to get out of bed, who to work for and enjoy a reasonable standard of living later in life for the rest of your life isn't a pension plan worth taking more seriously?
At what age would you like to become financially independent?
For more information contact Brian Sedge or Linda Hall of Williamson Carson on 020 8650 922 and quote "SWPP". Alternatively contact Aaduki Multimedia on 020 3633 2280 and ask for a call back.
Written by Brian Sedge and Nik Stewert and article approved by Williamson Carson (Life & Pensions) Ltd.
Nik Stewert is the National Marketing Manager for Aaduki Multimedia Insurance and was the previous Scheme Manager for Imaging Insurance. He has over 10 years experience in the insurance market with over 5 years specifically for photographers, journalists and video makers.
Brian Sedge is an Independent Financial Advisor with over 15 years experience. He is also an associate member of the Chartered Insurance Institute
Call us on 020 3633 2280 for more advice or if you have a specific question.
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