Understanding Investments: Business Owner’s Retirement Planning

Friday 5 August, 2022

As a business owner (self-employed or limited company) you have a greater degree of flexibility over how you are remunerated but also greater responsibilities for your staff, customers, and the future success of the business.

What can often be missed is the responsibility to focus on your own retirement planning. 

The big picture: The first stage is to quantify what level of income you will need in retirement, and what other capital events you need to account for during your retirement (eg dream holidays, house renovations, financial support for children for house deposits & weddings etc).

Once established, it’s possible to work backwards and identify how much you need to have saved to meet your retirement aspirations. We utilize market-leading cash-flow software to quantify this, considering inflation assumptions and projected investment returns. 

It’s possible to model different scenarios; for example, we can run one scenario to include a business sale, and another to assume the business continues under management to continue to generate revenue for the owner. 

The role of pensions: 

Whilst we would all hope that the business thrives and provides the capital needed to retire, sadly this isn’t always the case. Like all things in life, it’s sensible to diversify your options and saving into a pension can be a very effective way to provide further flexible capital for retirement with many advantages. 

What are the advantages of saving into a pension?

1-Tax Efficient:

Pension contributions are treated as a business expense so they save corporation tax for limited companies. They are a very effective way to draw excess profits from the business without the need to pay corporation tax on those profits, or income tax/dividend tax if drawn personally. The self-employed qualify for tax-relief so in effect pay no tax on contributions. There are annual allowances of £40,000 to consider but it’s possible to go back up to 3 years if full contributions haven’t been made, and use “carry-forward” to make higher contributions in the current tax year. 

2-Secure:

Pension schemes are protected to varying degrees, with some insured schemes offering 100% protection in the event of provider default. In addition, money held in a pension is secure and separate from your business. In the event of the failure of your business, pension savings are secure. 

3-Lower Charges:

Since workplace pensions were introduced, competition has increased, and charges have reduced. This is great for the consumer but sadly many existing pension schemes still charge the same as they always did. It is possible to consolidate and switch pension providers to save money after full analysis to ensure valuable benefits aren’t being lost. 

4-Inheritance Tax exempt:

Under current legislation, pension savings are not included in the value of your estate for IHT purposes. The pension fund can also be passed down to nominated beneficiaries on death in a tax efficient manner (tax-free pre age 75 and taxable at the nominated beneficiary’s own income tax rate post age 75). 

In Summary…

To summarise, with sensible financial planning it’s possible to pay less tax and keep more of your hard-earned money to fund your financial future. Hopefully this means you may either retire sooner or enjoy an improved lifestyle during retirement. If you would like to learn more or discuss your personal situation, we would be delighted to meet for a free, no obligation initial chat. Please contact our financial planning teams. For more information visit the  Retirement Planning section on our website.

The Financial Conduct Authority does not regulate taxation advice, estate planning, inheritance tax planning, cashflow plans or cashflow modelling. Pensions are a long-term investment not normally accessible until age 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. The tax implications of pension saving and withdrawal will be based on your individual circumstances, tax legislation and regulation which are subject to change.

 

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