The phrase “my business is my pension” is one of the most common excuses you’ll hear amongst members of the business fraternity to justify their lack of pension planning, but does it stack up as good business practice? This article explores the role and value of pensions both for your personal financial wellbeing and potentially the future growth or support of your business.

Let’s start by exploring why some business owners decide either to invest sporadically into a pension or not at all.

83%
of family run business owners are relying on their business to fund retirement
25%
of family run business owners expect to fund more than half of their retirement spending from their business

For early-stage businesses there can be many conflicting financial priorities from irregular cash flow, the need to re-invest in the business, reducing business borrowing or personal financial expenses. But assuming a business is established and profitable, it’s intriguing that so many business owners openly admit to relying on the future proceeds of selling their business. In fact in our recent study, we found 83% of family run business owners are relying on their business to fund retirement and one in four expect to fund more than half of their retirement spending from their business.

From market volatility caused by the pandemic and war in Ukraine, to the cost-of-living crisis, and advances in technology like AI, there are many factors out of a business owners control which can impact its future, no matter how well run.

It’s a sobering fact that only 36% of all UK businesses make it to their 10th birthday and the data is even worse for large businesses (employing over 250 people) with only 15% making it to the five-year mark. Even if a business does survive, it’s far from certain it will be attractive to a potential buyer or that you can achieve the value you think it’s worth.

If you couldn’t sell it, you’d be faced with the option of either continuing to work, handing it over to someone else or winding it up and using whatever reserves you have left to fund your retirement. If you could sell but for less than you needed or expected, you face entering your retirement with a degree of uncertainty and you may have to adjust your expectations and future goals.

Whether an early or later stage business, the fact is many business owners are overlooking the importance of wider retirement planning and are at considerable financial risk if their ambitions for their business don’t come to fruition.

The reality is that as a business owner with a limited company, pensions are probably the best way to extract cash from your business in an extremely tax-efficient way.

The benefits of investing more in your personal pension

Business owners are typically advised by their accountants to access income tax-efficiently – taking a base salary within their personal tax allowance and taking any further remuneration as dividends. This however can create a misperception amongst business owners who then assume that as their salaried income is under the personal allowance, contributing to a pension isn’t worthwhile. This of course couldn’t be further from the truth.

When you have a limited company, you can choose to make employer pension contributions, from pre-tax income, rather than making a personal pension contribution as an employee. This means you’re able to pay the full £60,000 a year into your pension and receive the available tax relief.

The scrapping of the Lifetime Allowance (LTA) means you can now build up a much larger pension pot without risk of charges for exceeding the previous cap, and if your spouse is involved in the business, they can also receive pension contributions, which can help to make the most of your combined personal and pension allowances.

If you own a limited company your business could save up to 19% in corporation tax because an employer pension contribution counts as an allowable business expense. Employers are also not required to pay National Insurance (NI) on pension contributions. At the 2023/24 NI rate this means your company can also save 13.8% by contributing directly into your pension rather than paying you the equivalent in salary.

If you own a limited company your business could save up to 19% in corporation tax because an employer pension contribution counts as an allowable business expense.

Another key benefit of investing in your pension are the inheritance tax benefits. As well as increasing your wealth through tax relief, your pension is an excellent generational planning tool. Your pension pot can effectively become a trust for your beneficiaries without the administration burden and punitive tax rates of normal trust vehicles. Assuming you do successfully sell your business, you could potentially live off the proceeds while your pension passes completely free of inheritance tax to your children.

Your pension could also support your business

A benefit of having a Self-Invested Personal Pension (SIPP) or Small Self-Administered Schemes (SSAS) is that they offer the scope to be able to invest directly in UK Commercial Property. As a business owner this flexibility may be particularly beneficial as your pension can purchase your company property via the pension fund.

The potential benefits of buying your own premises can be significant both for your business and for your pension.

  • Rent from the business is paid into your own pension plan rather than to a third party, so is no longer seen as “lost money”.
  • Rent is treated as a company expense which reduces the corporation tax payable (or income tax in the case of the self-employed/partnerships).
  • Income tax is not payable on rent received.
  • Capital gains tax is not payable on any increase in value if the property is sold.
  • The property will sit outside your estate for inheritance tax purposes, so it is easier for your family to inherit.
  • As rent accumulates, it is available for investment into other non-property assets.
  • If the business fails, the property will be protected from creditors.
  • It gives you control as it stops the possibility of a third-party landlord either:
    • Increasing rent above the market rate,
    • Selling the property; and/or
    • Being forced to move premises.

Before exploring the option of using your pension to purchase your company property there are some key considerations to take into account.

  • Diversification - holding a significant proportion of your pension in one asset increases the investment risk due to the lack of diversification. If there was a downturn in commercial property this could have a significant adverse impact on your retirement. As previously highlighted ensuring you hold a diverse range of assets, from cash to shares and alternative investments is the smart approach.
  • Liquidity - it can take time to sell particularly at a price you are willing to accept, so again it’s best not to put all your eggs in one basket by have the property as your only pension asset. If you do, then you may struggle to create liquidity to pay tax free cash or an income at retirement.
  • Business Risk - if the business fails and you can’t find another tenant or sell the property, there’d be no income, but you’d still have ongoing costs to pay.

A further benefit of having a SSAS is that you can also borrow up to 50% of the net value of the pension. The loan is repayable within five years on a repayment basis and the APR is at least 1% above base rate, yet it could be an invaluable resource to help with liquidity requirements.

The potential returns from starting your own business can be extraordinary, but every business owner should have a back-up plan, because with increased reward, inevitably comes increased risk.  Building your pension can ensure your financial future is secure, will take pressure off the need to sell your business and will make it a lot easier for your family to access money should you be unable to continue to run the business.

How we can help

Our expert financial planners can guide you through life’s big retirement questions, helping you to build a robust and flexible plan around your unique needs as a business owner. Our role is to help you achieve financial freedom faster, unlock more opportunities and bring you the peace of mind of knowing where your money and life can take you.
 

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Our role is to help you achieve financial freedom faster, unlock more opportunities and bring you the peace of mind of knowing where your money and life can take you.

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