Meeting objectives – Improve their current retirement savings provision.

Question 1

Recommend and justify a range of actions that Joshua and Amina could take in order to improve their current retirement savings provision. (29 points)

Answer 1

Rec:
* Keep the limited company structure and restructure income with dividends and salary.

Just:
* As the owner of the business, he has the right to set his own salary/dividends.
* Should increase net take home pay/more surplus income to increase pension provision.
* More tax efficient due to the NICs saving and lower dividend tax rates/8.75% and 33.75% versus 20% and 40%. Uses DA.
* Can ensure he still qualifies for State pension/benefits.

Rec:
* Joshua should make his full pension contributions as employer rather than personal ones (if he decides to keep the company open).
* Consider company contributions for Amina.

Just:
* The overall 8% requirement allows for this and does not require the employee to contribute/as the owner of the business, he has the flexibility to do this.
* It is more tax efficient due to the NICs saving.
* Employer’s NICs also saved, could be rebated into pension.
* Amina is company secretary/ contributions likely to be considered ‘wholly and exclusively’ for the purposes of the business.
* She is not near her annual allowance, therefore has scope for more contributions to be made.
* This is more tax efficient than personal contributions.
* Contributions for Amina can get money out of the business tax efficiently.

Rec:
* Increase pensions contributions
* Keep both of their total remuneration below £50,000

Just:
* Would regain full entitlement to Child Benefit if both incomes below £50,000 (£60,000 for 2024/25)
* Boosts retirement provision
* They would receive higher-rate tax relief on pension contributions.
* Tax free income and growth/PCLS/IHT free.
* Flexible death benefits/tax free before age 75.

Rec:
* Continue to use ISA allowances (up to £20,000)

Just:
* No Income Tax or CGT liability within the wrapper.
* They have cash deposits not ISA wrapped/currently paying tax at 40% above their £500 PSA
* Can invest in cash or stocks and shares ISAs as required.

Rec:
* Consider general account investments.

Just:
* Potentially sufficient cash/surplus income to do so.
* Able to utilise annual exempt amount and DA.
* Ability to utilise bed and ISA.

Question 2

Outline the benefits to Joshua and Amina of making regular monthly savings into their ISAs. (13 points)

Answer 2

• Tax-free income and gains.
• They have sufficient emergency fund/cash savings/surplus income/affordable.
• Inflation risk on cash holdings/reduces inflation risk.
• Matches their medium-to-high ATR.
• Pound-cost averaging/contributions buy more units when markets fall.
• Potential for growth.
• Long timeframe for investment as still young.
• Accessible/liquidity.
• Can start or stop contributions at any time.
• Savings discipline.
• Ability to diversify portfolio/use different investment styles.
• ISA allowance cannot be carried forward.
• Can use APS in the event of death.

Question 3

Outline why Joshua’s current method of pension contribution is not optimal for his needs and the actions he could take to improve this. (12 points)

Answer 3

• Current contributions are part personal and part company.
• Salary is deducted as a business expense.
• Employer’s/employee’s NICs payable.
• These are not reclaimable if personal contributions made.
• Pay the entire amount as an employer contribution.
• Also deducted as a business expense.
• Likely to be considered wholly and exclusively for business purposes.
• Full amount into pension/No NICs payable.
• Also no employer’s NICs/increase profits.
• Could rebate the saving into the pension.
• 8% requirement does not include minimum employee contribution.
• As the business owner, he has the flexibility to determine this.

Question 4

Explain the key benefits for Joshua and Amina of investing their regular pension contributions into equity-based funds. (11 points)

Answer 4

• Potential for capital growth.
• Best performing asset/outperformance over long-term.
• Long timescale to retirement.
• Pound cost averaging.
• Benefits from volatility.
• Inflation protection.
• Matches ATR.
• Wide range of funds/economies/diversification/can switch.
• Tax relief/tax free income/gains.
• Increases potential for growth.
• Low charges/economies of scale on workplace schemes.

Question 5

Outline how a bonus sacrifice arrangement works and the potential benefits and disadvantages to Amina of sacrificing her bonus into her pension.

Answer 5

• Bonus is paid directly into her pension.
• This is made as an employer contribution.
• Tax deductible as a business expense.
  Benefits
• Increases pension provision/investment growth.
• Tax-free income/gains/PCLS.
• NICs saving/employer may share employer’s NICs.
• 40% Income Tax saving.
• Tax-free on death prior to age 75.
  Disadvantages
• Loss of immediate cash.
• Illiquidity/cash tied up until at least age 57.
• Potential for capital loss.