Why pensions matter for Business Owners

Why Pensions Matter for Business Owners

By Stuart Lindsay, Head of Corporate Financial Planning, Gilson Gray Financial Management

As a business owner, planning for your retirement is essential. While day-to-day business operations can consume most of your time, setting up a pension should not be overlooked. Here’s what you need to know:

1. Increased Lifespan and Retirement Savings

• The Reality: People are living longer due to improved healthcare and living standards. However, this also means that you might outlive your retirement savings.
• Action Steps: Acting early allows you to save more and reduces the risk of financial strain during retirement. Consider your ideal annual retirement income using a pension calculator or sit down with a financial adviser and discuss your plan with the help of cash flow modelling.

2. Tax Benefits

• The Advantage: Contributions made to personal pensions are eligible for tax relief in the UK. This means you receive money back from the government, reducing your tax liability while building a retirement nest egg.
• Business Owners: Take advantage of this tax relief – it can be advantageous for your financial planning.

3. Business Expense and Corporation Tax

• Tax Efficiency: If you own a limited company, pension contributions can be treated as allowable business expenses.
• Benefit: This helps offset your company’s corporation tax bill, making it a tax-efficient way to take money from your business.

4. Exit Strategy and Capital Gains Tax

• Smart Move: If you plan to sell your company for retirement funding, contribute a lump sum to your pension fund before exiting.

5. Annual Allowance

• Limit: The annual allowance is the maximum amount you can contribute to your pension each year while still receiving tax relief.
• 2024/2025 Tax Year: The standard annual allowance is £60,000.

In addition to the points mentioned earlier, it’s crucial to recognize that relying solely on your business as the source of retirement income may not be the most prudent approach. Here’s why:

1. Business Volatility: Businesses can be unpredictable. Economic downturns, changes in market conditions, and industry-specific challenges can impact your business’s profitability. Relying solely on your business for retirement income exposes you to significant risk.
2. Diversification: Diversification is a fundamental principle of financial planning. By spreading your investments across different asset classes (such as stocks, bonds, property, and pensions), you reduce the risk associated with any single investment. Pensions provide an excellent way to diversify your retirement income sources.
3. Liquidity and Exit Strategies: Business assets are often illiquid. Selling a business or its assets may take time, especially if you’re looking for the right buyer. Pensions, on the other hand, offer liquidity. You can access your pension funds when needed, providing flexibility during retirement.
4. Health and Business Continuity: Health issues can impact your ability to run a business effectively. If you become unable to manage your business due to health reasons, relying solely on it for income becomes risky. Having a pension ensures financial stability even if you need to step back from active business involvement.
5. Succession Planning: If you plan to pass on your business to family members or sell it, having a well-structured pension allows you to transition smoothly. Consider how your business fits into your overall estate planning and retirement strategy.
6. Retirement Lifestyle: Your retirement lifestyle may differ from your active working years. You might want to travel, pursue hobbies, or enjoy leisure activities. A diversified retirement income, including pensions, provides the means to maintain your desired lifestyle.

Remember that a balanced approach is essential. While your business is a valuable asset, incorporating pensions into your financial strategy is sensible step to take.

For personalised guidance tailored to your specific situation, I invite you to get in touch with me, Stuart Lindsay, Head of Corporate Financial Planning at Gilson Gray Financial Management. Please get in touch and we can arrange a no obligation meeting to discuss your own plans.