For many small business owners, it can be only too easy to overlook retirement plans. Maybe you just started your business three years ago and you’re still focusing on the day-to-day to get your business off the ground, or maybe you’re only young and thoughts of retirement have not yet occurred to you.
The inconvenient reality of it is that, even if your business is your bread and butter, one day you will most likely stop working – and you need to be able provide for yourself when that happens.
Are you planning on using your business to fund your retirement?
Do you have a pension?
First thing’s first – do you have a pension? If you have previously worked for someone else, or if you have set yourself up with a pension, you’re off to a good start. However, you need to know how much is in it.
If you’re planning to retire at 65, you could have 40-odd years of retirement. Have you got enough to pay your rent or mortgage, can you shell out for holidays and keep up your current lifestyle?
You can check your pension here.
However, a lot of business owners may be tempted to prioritise the here and now rather than a far-off future of retirement. According to Karl Nendick Dip FA, director and independent financial adviser at Active Chartered Financial Planners, in 2017 at Active just 17% of pension cases were for the self-employed.
“For employed people, auto enrolment has made saving in to a pension much easier, but self-employed clients often still prioritise investing in their business rather than saving for their retirement,” he said.
“Saving for your retirement whatever your occupation is vitally important, but there are incentives for the self-employed to make contributions in to their pension, including tax relief, which could reduce their working lives by a number of years.”
Living off your business
Are you relying on your business to act as your pension? That’s another kettle of fish.
There are two main options here – selling your business and living off the proceeds, or passing it along to a successor that allows you to continue taking a cut, perhaps a family member.
The first option relies on you being able to find a buyer for your business, and being able to fetch a decent price for it. Your business is your baby, and sometimes there is a risk that you are too close to the issue at hand to be able to give a fair valuation – if this is the route you go down, be sure to do your research well in advance.
If you are planning to continue living off your business into retirement, are you confident it is resilient enough to bear up under new management? Does it make enough money to afford to keep paying out? Arguably more important – are your successors willing to let you take an income, or will it risk breeding resentment over time?
What are the alternatives?
It’s never too early to start thinking about your exit strategy, but if you don’t have a pension and you’re not sure you can rely on your business to see you through, there are alternatives.
It might be useful to have directors’ share protection or key person insurance in place, especially if you have a very small team. These could help your business stay afloat if the founder or another key member of a small business had to take a sudden leave of absence, or passed away. This could help future-proof your business.
There are also personal pension schemes you can set up, or you could seek advice about auto-enrolment.
Lastly, if in doubt, seek expert advice – it’s easy to get caught up in the day-to-day running of your business, and it might help to speak to someone who can see the bigger picture.
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