Much has been written and talked about following the announcements in the 2024 Budget about pensions coming into the estate for inheritance tax (IHT) purposes. Only this week I sat down with a potential new client and their perception of pensions was negative following the headlines.

After probing them for a while about why this is it was evident that the negative press had clouded their views on pensions even further than was the case previously. In addition, the lack of accessibility was another key objection they raised to funding their pensions.

The people in question run a successful business and have accrued a significant amount of cash in the business which (they hope) isn’t needed in the short to medium term. Their plan was to simply invest these funds to try and generate growth and eventually a passive income so they can wind down (or sell) the trading element of the business and use the passive income to support their lifestyles.

We talked through the options and again I floated the idea of pensions. They both have existing pensions which they funded with small amounts many years ago and therefore have carry forward available. When I mentioned that they could potentially save £110,000 of corporate tax by maximising contributions their ears pricked up.

In addition, by fully funding pensions for the next 5 years from future profits we can save another £30,000 per annum of corporation tax suddenly pensions were much more interesting to them. We calculated this course of action could save £260,000 of Corporation Tax and by the end of that period they will be able to access the pensions, so the accessibility part suddenly became less of an obstacle.

We then went on to discussing the tax-free growth of the pensions compared to a portfolio in the business. If a 5% return were achieved this would result in a net return in the business of 3.75% compared to the full 5% in the pension. Gross roll up as we call it in the trade.

Yes, but you pay tax on getting money out they said next. Indeed, but with the 25% tax free cash allowance and then controlling the withdrawals we can get the funds out at 15% tax. A level of tax they agreed sounded attractive compared to what they are paying now on drawing from the business!

Using the power of cashflow planning we quickly plugged in a scenario based on a company portfolio compared to using a pension and suddenly the penny dropped, and pensions weren’t the big bad beast they had first thought.

Now for this couple it is likely a combination of pensions and company portfolio make sense so we can use different tax allowances to pay them income in the future and keep option available to take advantage of tax changes in the future.

I love these sorts of meetings and even with IHT being a consideration the power of tax relief on pensions remains a compelling story.

Thanks for reading and #enjoythejourney