Best Pension for a Limited Company Director

As one of the leading online pension brokers in the UK, limited company directors can rely on Interactive Investor for no-frills account openings and exits.

One of Interactive Investor’s key selling points is no fees for account opening or closing, unlike AJ Bell, who charges a £9.95 transfer out fee.

The award-winning provider is the second-largest investment broker. They also offer the occasional signing-up incentives and cashback offers for transferring pensions, while SIPP account holders don’t pay monthly fees for the first six months.

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Why would a limited company director choose Hargreaves Lansdown (HL) for their pension investing? Because they offer a wide range of investment options if you know your way around trading.

HL is the largest investment platform, providing a raft of personalised and DIY assets and products, such as SIPP, ISA, and S&S. Even if you’re not a savvy investor, you have an option.

As a limited company director, you probably have a fluctuating income. HL accommodates this by allowing you to stop monthly contributions during a rough patch.

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Investors should seriously consider AJ Bell’s 0.25% custody charges. Although it looks inconsequential next to one of the industry’s lowest offerings by PensionBee (0.28%), it adds up since pension savings are for the long term.

AJ Bell does not charge account set-up, inactivity, holding, or withdrawal fees, which is great for your investment.

Moreover, cash balances attract a minimum interest of 0.05% for balances above £10,000, which rises to 0.15% for amounts over £100,000.

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If you need a versatile way to contribute, PensionBee might be the way to go. PensionBee designed several plans suited to your investment goals, to which you can contribute as much or as little as you wish.

Savers can choose from high, medium, or low-risk plans (like Impact, Shariah, 4Plus, or Preserve Plans) invested across diversified countries and asset types (bonds, stocks).

You can transfer your pensions to PensionBee at no extra cost.

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Penfold Pensions provides a simple app offering a variety of ready-made pension portfolios, minimising the hassle of self-selecting or trading.

The App designers targeted it at self-employed people with fluctuating earnings who don’t have the time to dabble in trading and investing.

Penfold’s digital platform will consolidate all your pensions into one handy pension pot in readiness for you to consult and select the right plan in line with your investment goals. The provider also offers a £1,000 bonus for consolidating your pensions.

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Bestinvest has operated in the investment industry for over 30 years, offering an extensive range of investment options good enough for any limited company director’s pension savings.

A look around the Bestinvest online platform reveals the award-winning provider offers a host of investment planning, investment advice, and financial planning services, ensuring a perfectly aligned customised pension plan suited to your savings goals.

Users can opt for DIY investments, ready-made portfolios, or seek financial advice from Bestinvest’s team of advisers before settling on a SIPP plan created from over 3,000 ETFs, funds, and shares.

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Like most other providers on this list, Moneyfarm is an online-only investing platform—with a twist.

The platform employs robo-advisers, facilitating automated investing and digital financial advice suited to casual investors. Automation enables investing with minimal human intervention.

Moreover, Moneyfarm uses a passive investment strategy to select or time the market, spreading funds across diverse assets like bonds, stocks, and cash. The firm has an investment team who will make the investing decisions.

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If you do not desire to spend time trading and managing the investment and several sizeable pension pots that need consolidating, have a look at Netwealth. The provider has a professional investing team to handle pensions.

First, you’ll meet certified financial planners who will ask you a series of questions and provide suitable recommendations after establishing your savings goals. After receiving the advice, you’ll set up a customised pension plan.

The investment team will take it from there and set about achieving the savings target by trading on your behalf. Netwealth is the ideal provider if you don’t want to make monthly contributions.

Netwealth’s financial advisers will also be at hand to answer any queries you might have, although they will charge you for specific advice.

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Pensions for company directors operate similarly to regular pensions but may include additional features and considerations:

• Contribution: You can make pension contributions personally and through your limited company as your employer.

• Annual allowance: This is the maximum, legally allowable yearly contribution. Exceeding this allowance attracts taxation.

• Pension tax relief: Personal and employer contributions are tax-deductible.

Company directors can be employees and employers, with significant tax implications on pensions as outlined below:

Other tax-efficient ways to employ cash as a company director

There are several tax-efficient ways to invest cash:

• Dividends: These are discretionary and contingent on the company’s financial situation, so they are not subject to National Insurance Contributions.

• Small-self-administered pension scheme (SSAS): As a family company director, you can establish SSAS for yourself and a select group of employees to provide family members with pensions and shares in the company’s assets.

• Self-invested personal pension (SIPP): You can also consider SIPPs as they offer a wide range of investment options and flexibility, allowing for more frequent portfolio management and investing.

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How to Avoid Paying Tax on Your Pension

A company director has a range of personal pension options at their disposal. All they have to do is settle on a defined contribution plan from a desired provider, be it a SIPP, stakeholder pension, traditional personal pension, or other fund, and pay the monthly contributions.

Traditional personal pension

A traditional personal pension is a defined contribution pension where the amount you contribute and how well your investment performs determines the amount you receive in retirement.

The plan offers three investment options:

• Insurance company funds: An insurance company invests your money across various funds.

• Cash: A low-risk investment yields lower returns than most other pension options.

• Ready-made personal pensions: Pre-packaged plans. Promises lower fees and less involvement in the investing process.

Stakeholder pensions

A stakeholder pension is a defined contribution pension plan that allows for retirement savings through regular but low contributions.

The scheme is ideal if you need a basic pension plan strictly regulated to offer default investment funds, flexible contributions, low minimum contributions, unit and investment trusts, fee-free transfers, and capped charges.

However, a stakeholder pension has limitations in the investments it can hold, leaving you with fewer options than with other pension plans.

Self-Invested Personal Pension (SIPP)

SIPPs provide more investment options than traditional personal and standard stakeholder pensions. Due to the extensive list of assets and funds, these are best left to seasoned investors. Possible investment options include:

• Unit trusts and investment trusts

• ETFs

• UK shares and bonds

• Cash

• National Savings and Investment products

Workplace pension options

A workplace pension is a retirement savings option set up by an employer, allowing directors to deduct pension contributions from their salary. Examples include group stakeholder pensions, SSAS, and Multi-Employer Pension Schemes.

Group stakeholder pensions

In this arrangement, you contribute to a collection of stakeholder pensions provided by the company. You will contribute to the pension as the company dictates, making an equivalent contribution.

Group stakeholder pensions offer flexible contributions, enhanced tax benefits, lower charges, and operate under more rigorous regulations than individual plans. However, they offer limited control and investment options which may not be ideal for directors.

Small Self-Administered Pension Schemes (SSAS)

An SSAS applies to a select group of company employees or directors, usually up to 11 employees.

The main perk of an SSAS is the greater freedom in choosing investment options for the scheme’s funds. An SSAS relies on trustees usually selected from the scheme members.

A pension plan trustee or scheme administrator is responsible for tasks like:

• Scheme registration with pension regulators

• Registering pension with HMRC

• Filing required returns

• Sorting tax benefits for contributions

• Paying specific taxes

Multi-employer pension schemes

It’s an umbrella term for workplace pension schemes accessible to employees of different companies and run by a board of trustees. These schemes are a popular choice for auto-enrolment.

They pool funds from many companies, resulting in lower administrative costs and better investment opportunities for the members. They offer little wiggle room for personalised plans or involvement in investing, so they are not ideal for limited company directors.

Contribution limits and tax relief are crucial aspects of pension planning, as they impact how much a company can pay into a director’s pension.

How much can a company pay into a director’s pension?

There is no limit on the amount a company can contribute to your pension and still claim pension tax relief, as long as it meets the “wholly and exclusively” test by HMRC and doesn’t exceed the company’s annual profits.

Some directors sell or buy UK businesses to fund their retirement, using the proceeds to boost their savings.

You can also make personal contributions to your pension, up to 100% of your salary.

How much can a director personally pay into a pension?

The annual pension allowance for a director for 2023-2024 is £60,000. The first £60,000 doesn’t count towards your annual allowance so you can contribute it to your pension.

Salaries and dividends can affect your yearly allowance. Dividends are worth £1 for every £3 of your salary. So if your yearly wages are £60,000 and £20,000 in dividends, your annual allowance reduces to £40,000.

Many directors use this strategy since a limited company can make unlimited contributions to a director’s pension. Even if the director’s salary is below £60,000, the company can contribute the full £60,000 annual allowance.

Tax relief for director pension contributions

If a company meets specific criteria, including not exceeding the annual allowance of £60,000 and being deemed “wholly and exclusively” for business purposes, contributions to a director’s pension may be exempt from taxation.

Basic-rate taxpayers automatically get 20% relief at source, while those paying the higher or additional rates must file a Self Assessment tax return.

Tax relief comparison for personal and company payments

Private pension contributions can attract up to 100% tax relief. Personal pension contributions are subject to tax relief based on their marginal tax rate.

Company pension contributions become pre-corporation tax and are not subject to national insurance or personal income tax.

When determining the amount of tax relief for either type of contribution, use the highest marginal tax rate of the contributor.

Learn more

How to Avoid Paying Tax on Your Pension

Failure to appraise the charges could lead to surprise fees taking a huge chunk off your funds and profits.

For example, if you start with a small amount, a percentage fee may cost less than a fixed fee but will prove costly for more considerable sums. Opt for providers with a lower percentage rate as the pension fund grows.

You should also beware of hidden costs such as share trading price, funds transfer, and FX rates.

These vary from provider to provider, with some charging as little as £1 while others charge several thousand. Ensure the minimum and initial contributions won’t strain your finances.

Investing needs and expertise vary widely, so lean toward providers suited to your abilities. For instance, choose a platform that offers managed funds or ready-made portfolios if you’re a novice investor.

On the other hand, an experienced investor would do well in a platform providing a wide array of asset classes, including funds, bonds, ETFs, and S&S.

Limited company earnings typically fluctuate monthly, affecting your ability to meet set monthly contributions. Settle for a provider with flexible contribution options.

Best pension providers for high-earning directors

High-earning directors should reclaim their personal allowance by reducing their PAYE salary and depositing the rest as a pension contribution up to the allowable yearly limit, as this is more tax-efficient.

The best pension providers for high-earning directors include Netwealth, AJ Bell, HL, Moneyfarm, Bestinvest, and Interactive Investors. These platforms offer a mix of low fees for larger funds, diverse investment options, and actively-managed portfolios.

When deciding on a pension, the following are essential considerations:

• Costs and penalties

• Tapered annual allowance

• Investment options

• Alignment with investment goals

Best pension providers for experienced director investors

Best director pension providers for ready-made funds

Here are the best director pension providers for ready-made funds.

You can make pension contributions in two ways:

1. Personal pension contributions: Contribute up to the annual allowance and receive tax relief at your highest marginal income tax rate.

2. Contributions via a limited company: The company may contribute up to the annual allowance to your pension plan. You can receive corporation tax relief because these qualify as business expenses.

1. Since employer contribution is an allowable expense, your company can receive tax relief up to 25% through contributions from pre-taxed company income.

2. The ‘wholly and exclusively’ test determines whether an employer’s pension contribution is tax deductible.

3. HRMC will also check whether pension contributions exceed your company’s annual profits and if your employees receive the same pension contributions as others with comparable responsibilities.