For many business owners, their retirement plan is to raise sufficient capital from the sale of their business, to secure a comfortable life for themselves and their immediate family. For some this will happen, however in reality for many it will not.
Many business owners accept that their business provides them with a 'lifestyle' in the form of an income, but that it is unlikely to produce a sufficiently large capital sum at or near retirement, often because the business is so dependent on the owner(s).
If you realise early enough that this may reflect your situation, appropriate alternative planning can be put in place, so that over the years you can gradually reduce your financial dependence on your business. And if you do carry on working, it may even be possible to use the fruits of this alternative planning in later years to actually help the business.
Even if you do have a business that will have a value when you come to retire, the valuation itself will almost certainly and to at least some degree, be subject to the vagaries of the marketplace.
Creating financial independence
Having read the above you may well have concluded that your business is financially robust and has a strong independent management team who could continue to grow the business in your absence. If this is the case, then there may well be a long list of potential buyers queuing up to purchase your share in the business.
But what if there is not? And even if there is now, will there be when you want to sell? What will the markets be like when you do decide to sell?
Alternatively, you may have concluded that the future is uncertain and that there is a risk that you will not be able to realise sufficient value from your business to support you and your family through a comfortable retirement. If you have any doubts, you should seriously consider how you can create financial independence for you and your family outside of your business.
This will involve a sensible policy of extracting profits from your business and investing them in a tax-efficient investment environment. One such solution is the use of pension plans as part of this strategy for the following reasons:
- You receive full corporation tax relief and suffer no personal tax on the contributions the company makes.
- The funds grow free of all major UK taxes.
- You no longer need to buy an annuity at retirement.
- You are able to take up to a quarter of the accumulated funds as a tax free lump sum for any purpose from age 55, your funds are completely ring fenced outside your business and should normally have complete protection from creditors.
However, this solution will not be suitable for everyone, so it is important that a full discussion of your circumstances takes place.
We find that many business owners that take the time to consider their future conclude that creating financial independence from their business using tax efficient savings products is a strategy well worth investigating. If you wish to discuss all the options available to you and potentially develop a suitable plan please do not hesitate to contact us.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.