Are you wondering how investing in a pension fund can benefit you financially? Here are some key points to consider when it comes to money going into and coming out of your pension fund.
Firstly, when money goes into your pension fund, it becomes your personal pot. This means that once you leave a company, the money in your pension fund is no longer the company’s property, and creditors cannot access it even if the company goes bankrupt.
Additionally, investing in a pension fund offers significant tax reliefs. For instance, you get Corporation Tax at 19%, which will soon increase to 25%. Currently, if you make £10K profit, you pay 19% corporation tax (£1,900). However, if you take that money out, you will pay dividend tax of between 8.75% to 39.35%, resulting in a total tax between 27.75% and 58.35%! The good news is that if you put £10K into your pension, it costs only £8,100.
On the other hand, when money comes out of your pension fund, you stand to gain even more. For instance, if you pass away, the entire fund is payable to your beneficiaries free of all tax, including income tax, corporation tax, and inheritance tax. Furthermore, beneficiaries can leave the money in the fund if they wish, and it will continue to grow tax-efficiently.
You can also use your pension fund to purchase commercial property through a Self-Invested Personal Pension (SIPP). This means that there will be no capital gains tax on the property growth, and the rent will go directly into your pension without any tax deductions. This is a win-win situation as you are no longer paying rent to a landlord, and the money that would have gone to rent is now going straight into your pension fund.
You can take 25% tax-free from your pension fund, and the rest will be taxed. However, this can be managed through drawdown, and the tax will generally be 20% max (much less than the relief on the way in). As you have had 25% out tax-free, the equivalent rate is only 15%!
In summary, investing in a pension fund is one of the last tax breaks for companies left, and the revenue only allows £40K per annum as it is so tax-efficient. You can even go back three years, so the maximum you can invest is £160,000. By investing in a pension fund, you can save up to 63% in tax on the way in and pay only 15% on the way out. Furthermore, if you pass away, it is even more tax-efficient. So start investing in your pension fund today and secure a financially stable future for you and your loved ones.