My Business Is My Pension

May 26, 2022
May 26, 2022 John Sloan

My Business is my Pension?

Quite often when asked about retirement planning, many business owners reply with “sure my business is my pension”.  This might seem reasonable enough but what, if any, are the potential snags?  Here are a few points to think about when considering using your business as your pension.  We will be covering these, and more, in our upcoming webinar in September.

 

If a business is going to be used as a retirement fund, then there are some things that need to be considered.

 

Is the business sellable?

Will someone want to buy the business? Is there something tangible to sell or is the main selling point the business owner and their relationship with clients (also known as goodwill)?

 

Will it really be sold?

If a business is sellable then will it actually be sold? Or if it is a family business, then will it pass on to the next generation and no value be realised for it?  How could value be extracted to provide a “pension” or income in retirement and how would this work in practice?  If part of a business is effectively gifted then this may be deemed to be a disposal of an asset for Capital Gains Tax purposes.

 

Are there other owners?

Does the business have other partners or shareholders who may not want to sell the business? Do they want to buy the rest of the business and if so, then do they have the funds to do so?  If the other business owners can’t or don’t want to make changes of any description then this could provide issues for considering using a business as a pension!

 

Is the business too reliant on the owner?

This does not just refer to business relationships (as noted above) but also in terms of the operational side of the business. Quite often a business can be reliant on the owner being a key person in it.  The owner might be the main designer, the top salesperson or even the face of the business (one that people recognise as being the brand).

 

For a business to be sellable, and work as part of a retirement plan, then it needs to be able to work independently of the owner.  If it isn’t, and the owner manages to sell the business then the new owners might require a handover period, a golden handcuff arrangement for a certain period of time (which could be several years).  This may well mean that the previous owner is tied to the business before being able to walk away completely. Whilst the business is part of the retirement planning fund, it may hinder the business owner from retiring (unless they have planned the tie in period fully).

 

What is the business worth?

Or rather the question is what does it need to be worth?  To help fund retirement then it would be useful to know how much the business owner will need to sell for so they can have a comfortable retirement. A financial plan with cashflow modelling is the key to answering this question. Financial planning will allow the business owner to run through various scenarios in relation to their life and future plans and help them to consider what they need the business to be sold for. If a business owner knows that they need to achieve a price of say £500,000 then would they want to hold off their life plans for a few more years to possibly try and sell for £600,000. The opportunity to enjoy the retirement that they want could be delayed or even lost.

 

What next?

If a business owner plans to use a business as a pension, then there are a lot of things to consider. One of the main things is to think of what they want retirement to look like.  A lot of thought and planning should go into the entire process as it may not be as straightforward as people would like to believe.  It will likely involve working with professional advisers such as accountants, solicitors and financial planners.  This can seem quite daunting, so to help explain some of the planning opportunities for business owners, have a read of our guide Financial Planning for Business Owners.  Also already noted, we will be holding a seminar in September on this topic so keep a look out for that (and if you want further details on the webinar then please drop us a line!).

 

NB. If this is something you are thinking about, everyone’s situation will be different and so you should seek independent advice, most likely from a financial planner, solicitor and accountant.

 

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