Case Study - The use of Pension Input Periods for Tax Planning

A married couple were in partnership and ran a successful business. They had a buyer for the business and were interested in selling, as they wanted to retire completely now they were in their early sixties. As the business was structured as a partnership this was going to result in a large Income Tax liability on the sale of the business of approximately £250,000. Up to the point of sale they were earning £100,000 and £50,000 per annum gross respectively.

Their objectives were to replace their income from the partnership as they felt less secure about the future now they were selling the business, to reduce their income tax liability if possible and to try and mitigate their potential Inheritance Tax liability.

We maximised their pension contributions prior to the sale of the business and by changing the ‘Input Periods’ they were able to make total gross contributions of £300,000 (£234,000 net of basic rate tax) within a short space of time. They immediately took the 25% Tax Free Cash entitlement (£75,000), which left a residual pension fund of £225,000 for a net (of basic rate tax relief) contribution of £159,000.

The £300,000 gross contributions increased both of their basic rate income tax bands and as they were already 40% taxpayers this saved a further £54,000 in Income Tax when their self-assessment was completed (18% of £300,000). Therefore for a net cost of £105,000 they had a residual pension fund of £225,000, which is an increase of 114%!

The residual pension fund remained in Unsecured Pension (USP) giving them the option to take an income from the fund if they wanted to. Although USP is not always suitable for clients due to the risks involved (investment risk, annuity rate risk and longevity risk), our clients had significant other savings available to them and other sources of pension income that were guaranteed and therefore only needed to take a relatively low level of income from the USP funds at that time. Therefore, in this particular example the benefits of USP were dramatic.

Our clients were happy as this meant that they could be less reliant on their investment income and could consider gifting cash away to reduce their Inheritance Tax liability. We arranged a cash flow forecast to give them an idea of the amount of capital they were likely to need to retain. Each year we meet with them to review the level of income they take from the pension arrangements in consideration with their overall income requirements and Income Tax position as well as reviewing their cash flow and Inheritance Tax situations.



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