Your Business Should Never Be Your Pension

The phrase “my business is my pension” is one I hear quite often from business owners and I get it. It takes a lot of sacrifice, both mentally and physically, to build your own business and also a lot of personal expense.

It can mean pouring all your finances into your business in the hope that one day it has enough value to it that you can sell it and ride off into the sunset. For some they may decide to keep the business and take a backseat in the future while still maintaining an income.

As hard as it is you should never rely solely on your business to provide for your retirement. You would be taking a massive risk that could mean you end up not only losing the business you built, but losing your retirement too.

The problems in relying on your business to provide for your retirement

According to a survey carried out last year for Prudential, nearly half of all self-employed workers do not have a pension.

I personally feel it’s not just the self-employed that are not saving into a pension, it’s business owners of limited companies too. Yes there are now auto-enrolment rules in place that mean every business needs to set up a workplace pension, but business owners can opt out.

Here are the problems when relying on your business as a pension.

1. You may not be able to sell your business at the time you want to
   • You may not receive the offer you are hoping for.
   • Your business sector might be out of favour at the time and therefore no buyers available.
2. You may pay a big tax bill when you do sell
   • Most people will pay Capital Gains Tax when selling a business at around 20% of the value of your shares.
   • You may qualify for Entrepreneurs Relief which may reduce this tax bill to 10% but still a hefty sum that will not be available for your retirement.
3. You may need to continue working and/or face ongoing liability after you’ve sold
   • Depending on the type of business, many prospective buyers will ask you to carry on for a while as part of the deal to ensure a smooth transition.
   • Some will ensure that you are still liable for compensation years after the sale.
4. You still need to decide what to do with the money when you do sell
   • Most investment products have some form of annual allowance, meaning you will not be able to save the sale proceeds tax efficiently for some time.
   • This means a reduced income and a higher tax bill in the early years following your business sale.
   • Worse, you may have to end up keeping too much in cash not earning you any return.
5. Your business fails and you end up with nothing
   • The worst of all but there is always a risk this could happen.
   • A potential large complaint not covered by an insurance policy could wipe you out.
   • Trends change, perhaps your services or product are not something that will be required in the future?

This last point is the biggest risk. By relying solely on your business to provide for your future you have all your eggs in one basket. There is no back up plan.

The benefits of a back up plan

Instead of relying solely on your business you need a back up plan. A separate savings/investment portfolio that can secure your financial future without having to rely on selling your business.

This means saving into Pensions, ISAs and other tax efficient investment vehicles.

Not only is it a good idea to have a separate portfolio as your back up plan,  it also has two other major benefits:

1. It’s a good way of getting money out of your business now, tax efficiently
   • Making employer pension contributions into your own pension is a great way to reduce your Corporation Tax bill.
   • All money saved into pensions will grow tax free.
2. Easier for your family to inherit
   • If you were to die and your family inherited your business it may not be easy for them to release funds.
   • Even if you did have some form of business insurance in place they still need to decide what to do with the payout.
   • Much easier if you have built up a tax efficient investment portfolio that they can access quickly and easily.

The potential for future gains from starting your own business is huge, so it is a great way to secure your financial future. A risk controlled investment portfolio is never going to earn you as much as you could potentially earn from a company you build being sold or listed on the stock market.

However the higher reward, the higher the risk and it makes sense to diversify to ensure your financial future is secured with a back up plan.

If you would like to discuss the content discussed in this article then please get in touch for a no obligation chat at our expense.

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.