In an earlier blog I asked Jonathan “What’s a pension?” If you want to know his reply in detail, which highlighted why I need to bury bones in the garden, then read, WTF: Different tax advice on the timing of pension contributions in 2023.
Having understood what a pension was and what a good idea they are, I was surprised to overhear him explain to a client that while he was Watching The Funds, he’d noticed that employees could end up with bigger pension funds than their employer; and he had concerns that employers may not have a decent income in their retirement.
Lessons from Dickens about money
As a well read Labrador, I am well aware of the Micawber principle that something good will always turn up and that income in excess of expenses results in happiness, whereas expenses in excess of income will result in misery. So why did he have concerns for employers in their retirement?He explained that there were two reasons for his view:
- Some entrepreneurs are of the view that their business is their pension, so they are not putting money into their own pension pot; and
- Employees who do not opt out of Auto Enrolment (“AE”) are currently having 8% of their qualifying salary paid into their pension fund.
Retirement income - don't leave to fate
“Putting all future retirement income in the hands of fate is a bit like trusting a cat to be around when you need it the most” said Jonathan.
So, I wonder, is a pension fund a bit like a faithful Labrador, always around and willing to be of assistance (why else are we the best choice for guide dogs and helping dogs?).
Jonathan went on to explain that the business environment can take a turn for the worse just when retirement was beckoning for the business owner. This could be because what their business does is no longer needed due to changes in technology (who remembers 'Blockbusters'?) or changes in consumer habits (the fate of Arcadia is a good example of this).
A more recent example is the Coronavirus epidemic that has had a catastrophic impact on lots of businesses that were previously profitable and might have been sold to fund an owner’s retirement.
So, what practical steps can a business owner take?
Jonathan’s advice is:
Decide on what a fair salary would be for the work that they do and then pay 8% to 10% of that figure into their pension fund (but please check that this level of contribution is allowed).
Paying a monthly amount of say £400, rather than aiming to pay £4,800 once a year is a better strategy. An unexpected expense can derail best laid plans which means the annual contribution may not be made (I can tell Jonathan is still remembering my unexpected stay at the vets following me helping myself to his luxury mince pies last year).
Now, following his advice when I get a bone, I need to remember to bury a small part of it in the garden for future use.
For regular followers of my blog, you may be surprised there has been no mention of my nice friends at Xero.
Wait no longer. By using Xero and discussing your up to date results with Jonathan, the tax savings made from a pension contribution will surely pay dividends in the longer term.
Finally, Jonathan has told me that neither he nor I are authorised to give specific advice on pensions; so please speak to an Independent Financial Adviser about how you can invest in pensions. I wonder if they give advice on how to get a return on my bones?