Why Your Business Isn’t Your Pension & What To Do About It

Introduction

In today’s fast-paced and unpredictable world, many entrepreneurs view

their business as their primary source of retirement income. However,

relying solely on selling your business or keeping it to generate income can

be risky and may not provide the ideal financial security for your retirement

years. In this blog, we will discuss the potential pitfalls of depending solely

on your business as your pension and explore alternative strategies to help

secure a comfortable retirement.

By the time your business starts to flourish, many of you won’t have the time

to think beyond the day-to-day running of it. It’s important for me to bring

this to your attention and you keep it in mind so you can build your business

in a way that fulfils your long-term objectives. I’ve seen too many people

think about these things too late. When you start making enough profit that

you’re deciding whether to take it as extra income or to reinvest it in the

business, you could also choose between putting away for retirement. Here’s

why…

The Risks of Relying on Selling Your Business

1. Market Volatility: The value of your business can fluctuate significantly

due to changes in market conditions, industry trends, or economic

downturns. Depending on the timing of your retirement, you may be forced

to sell your business during an unfavourable market, resulting in a lower

sale price than anticipated.

2. Business Succession Challenges: Transferring a business to a new owner,

or family member, can be a complex process. Finding the right buyer willing

to pay a fair price and maintain the business’s success can be challenging.

Without a reliable succession plan, your retirement income could be at risk.

3. Uncertain Business Performance: The future success of a business is never

guaranteed. Factors such as increased competition, changing consumer

preferences, or disruptive technologies can impact the profitability of your

business. Relying solely on your business’s income for retirement without

diversifying your investments exposes you to significant risk.

4. Emotional Attachment: Selling a business you have built and invested in

can be emotionally challenging. It may be difficult to detach from the

business and make objective decisions about its sale. Emotional factors can

influence the timing and terms of the sale, potentially affecting the financial

outcome.

5. Tangible assets: It’s not always as saleable as you first think. I’ve had

conversations with multiple people who ARE the business but still think they

can sell their business. It might be true. But, it’s often difficult to get

someone to pay good money for your returning customers or ongoing

income if it relies on you.

You might only be able to sell part of your business. If you’ve designed a

particular product or service patented or copyrighted, it’s probably easier to

sell than your entire business. It might affect the value because you’re

reducing what the buyer gets. But it could also make it more saleable

because it reduces the new things an existing business must deal with, it’s

simpler.

6. Risk to the new owner affects value: There is a risk to the new owner that

they’re liable for your business activity. If you’ve ever delivered a poor

product quality or service to unresolved issues and legal disputes. You might

not have known about it at the time. Another risk for a business buyer is the

discovery of non-compliance with regulatory requirements and governance

practices. This can include violations of industry-specific regulations, failure

to meet legal obligations or inadequate internal control systems. Noncompliance

can result in fines, legal liabilities, reputational damage, and

even business closure. The risk affects the value and how readily someone

will buy your business.

The Drawbacks of Keeping Your Business for Income

1. Lack of Diversification: Keeping your business as your primary source of

income limits your ability to diversify your investments. By relying solely on

your business you are exposing yourself to the performance and risks of a

single asset. A diversified investment portfolio can help mitigate risks and

provide a more stable income stream during retirement.

2. Business Management Challenges: As you approach retirement age, you

may desire a more relaxed lifestyle. However, running a business requires

continuous dedication, management, and involvement. It may not be

feasible, or desirable, for you to maintain an active role in your business

during retirement. You might plan on getting someone else to run it but that

relies on trusting someone who might move on to new employment.

What can you do to set yourself up for retirement?

1. Get money out of your business. Use help from an accountant and, or

financial planner. If it isn’t saleable, you need to plan to get your money out.

It might be possible to close your business and pay a 10% tax to receive the

funds.

2. Use pensions as a tax-efficient way of getting money from the business.

Pensions are a business expense if you have a limited company so it will

reduce profit and therefore corporate tax bill. They have tax relief for

various other business types (it’s too much for me to go into this here so

you’ll have to reach out for advice on how to take pension contributions tax

efficiently).

3. Getting money out of the business can also protect it. If you’re made

bankrupt your pension won’t be considered (unless you’re making pension

contributions to avoid paying your creditors) whereas business assets would.

In addition, if the business is sued and you’ve already taken the money out,

it’s already ringfenced as yours, not the business’s. Be careful not to take too

much and use the funds you need for cash flow.

You might need help from a financial adviser to tell you how much you can

take out without exceeding your annual allowances. It’s possible to go back 3

years using ‘carry forward’ but the rules can be complicated.

Take money out in a way that works for you, whether little and often or lump

sums just before your company year-end. A good financial planner will

communicate with you before your company year-end to see if you can

contribute more. Work with a professional who manages your cash flow.

4. Diversify your assets. You don’t have to use pensions for this. You can take

additional income specifically to buy other investments such as ISAs and

properties. Don’t forget to contact a financial adviser for advice if you’re

unsure which assets to invest in and to make sure you’re not paying too

much tax. My contact details are at the end.

Did you know you can buy a commercial property within certain types of

pension? These are really tax-efficient. That means you have an asset in your

pension that generates an income. While it’s running your business can pay

rent to the building in your pension. When your business closes you can find

a new tenant to carry on paying an income to your pension, or you could sell

it. There would be no capital gains tax on the increase in value too. However,

they will only be suitable for investors who are experienced at actively

managing their investments and tend to have higher costs than a standard

pension.

5. You could use your problem-solving skills to find a way to get around any

of the above points. For example, some people have successfully managed to

hand over control of running their business to someone else so that they can

retire. I just wanted to point out that it’s not as simple as it might seem.

Develop a comprehensive succession plan for your business to ensure a

smooth transition and secure the business’s value for retirement. Explore

who could run it, especially if you plan to work in it part-time. This may

involve identifying and lining up a successor, considering external buyers, or

exploring employee ownership models.

I’d encourage you to explore whether you can sell your business. I had some

clients who owned a veterinary practice. They didn’t think they could find a

buyer because their business was based out of a section of their home and

there was only one competitor in the area who could have replied to people

switching services to them because there was no other option. They sold it

for ￡2 million. Luckily, they did explore the sale of the business.

However, try to spread your risks. Take the example of my clients who sold

their business. If that sale hadn’t happened, they had already taken as much

as possible out of it and into their pension so that they had enough assets to

live on. So, they had a plan B which also made the sale less important, which

probably helped with their bargaining power. They were able to negotiate

knowing that they had a variety of options.

Conclusion

While your business may be a valuable asset, relying solely on it for

retirement income can be risky. Market volatility, succession challenges, and

uncertain business performance can jeopardise financial security. By

diversifying your investments, making pension contributions, planning for

succession, and seeking professional advice, you can create a more robust

financial plan for your retirement. Remember, your business should be a

part of your retirement strategy, but it should not be your sole pension.

For help from a financial adviser, my details are below. If you’re unsure

whether you need help from me, or your accountant, feel free to contact me

and I’ll tell you if I can help.

Jamie Lowe

07469 712299

[email protected]

www.truselfwealth.co.uk

www.calendly.com/jamie-lowe-tsw

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SJP Approved 21/06/2024