For business owners, the idea of using your business as your retirement plan can be both appealing and risky. To have worked so hard and sell your business to live your retirement dream can be a comforting thought, but it’s important to understand the potential dangers that come with this approach.

In the Great British Retirement Survey, Interactive Investor engaged with approximately 9,000 workers, uncovering some concerning findings. It revealed that a significant 76 percent of self-employed individuals participating in the study are not contributing anything to a pension plan, and an alarming 38 percent do not have a pension at all. Thinking about your retirement and discussing the moves to secure your financial future is both necessary and reassuring.

The Pitfalls of Banking Solely on Your Business

As a business owner, you have invested your heart, soul and countless hours into your work, and it’s entirely understandable to see your business as your main asset to fund your retirement. You may have made significant sacrifices along the way, including time with family, relationships, and life experiences, all in the pursuit of building your business.

The idea is straightforward and simple: ‘When the time comes, I will sell my business and enjoy a well-deserved retirement’. While this approach can be successful for certain individuals, it’s essential to address the following challenges:

• Timing and Market Trends: Selling your business when you want to may not be guaranteed. Factors like market trends and demand for your business sector can affect your ability to find buyers. If your industry falls out of favour, it may be challenging to secure the offer you hope for.
• Tax Implications: When you do sell your business, you may face a significant tax bill. Most individuals selling a business will be subject to Capital Gains Tax, which can be around 20% of the value of your shares. While you might qualify for Entrepreneurs Relief, reducing the tax bill to 10%, it’s still a substantial amount that won’t be readily available for your retirement.
• Continued Involvement: Depending on the nature of your business, potential buyers may require you to continue working for a period to ensure a smooth transition. You might also remain liable for certain obligations even after the sale, which could impact your retirement plans.
• Managing Sale Proceeds: Once you’ve sold your business, you’ll need to decide how to manage the proceeds. Many investment products like pensions and ISAs have annual allowances, limiting your ability to save the sale proceeds tax-efficiently for some time. This could result in a reduced income and higher tax bills in the early years after the sale. Keeping too much in cash without earning returns can also be a challenge.

The Path to Financial Security: Investing in a Pension

To tackle these pain points and secure your retirement with confidence, consider a pension as part of your retirement strategy. Here’s why a pension can be a game-changer:

• Tax-Efficiency: Pensions offer a tax-efficient path to building your retirement fund. In the UK, company pension contributions can be made with pre-tax income, reducing your corporation tax bill. Also, investment growth in pensions is tax-free, making it a smart choice for accumulating wealth.
• Diversification: Contributing to your pension is a vital aspect of securing your retirement and financial future. Rather than staking everything on the performance of your business, building up a pension may allow you to diversify your investments. It is a way of safeguarding your financial stability and ensuring that your retirement goals on track, irrespective of market volatility and what may happen to your business.
• Flexibility: The main benefits of pension flexibility come into play when you decide on how to access your pension savings in retirement. Whether through a lump sum, regular income, or a combination. Pensions offer versatility in shaping a tax-efficient and sustainable retirement income during retirement.

A Secure Retirement Beckons

While it’s entirely natural to view your business as your retirement safety net, it’s essential to recognise the risks involved. Depending solely on your business can leave you exposed to market uncertainties and unforeseen challenges.

By contributing and building wealth in a pension, you gain the advantages of tax-efficient savings, diversified investments, and flexibility during retirement. Ultimately, this approach can be your key to a secure and worry-free retirement, allowing you to enjoy your retirement years without the fear of running out of money.

So business owners don’t gamble with your retirement. Understand the pitfalls of relying solely on your business and explore the benefits of a pension.

Have any questions regarding your retirement? Get in touch for a free, no-obligation consultation.

Risk Warnings

• The value of your pension may go down as well as up. You may also get back less than you invest.
• Past performance is not a reliable indicator of future performance.
• The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
• A pension is a long-term investment. The value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.