5 proven retirement strategies for business owners
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
As a business owner, it might be hard to imagine your future without your business. After all, you have spent many years building it up and making it a success. Yet a sustainable business eventually needs to survive without its founder(s). How can you prepare for retirement whilst leaving your creation in safe hands?
Below, our Grantham financial advisers at Castlegate offer five proven strategies which can work for business owners who want to prepare for retirement. We hope these ideas are useful to you. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
#1 Exit strategy
For many owners, their personal wealth is very closely intertwined with their business wealth (e.g. sole traders or those who run a family business). Stepping away, therefore, is not always straightforward. Here, a gradual divestment strategy is often appropriate as the owner nears retirement – e.g. selling specific assets to one or more buyers at various stages.
Here, a well-conceived exit strategy is essential. Perhaps you intend to hand the business down to a family member, such as a son or daughter. Or, maybe a third-party buyer will be the best course. The earlier you set out a plan with a financial adviser, the more likely you can secure better terms and timing for your eventual handover.
#2 Income stability
Unlike many employees who enjoy a regular and predictable salary, many business owners experience great volatility with their income. Some years bring in a lot of income. Others (e.g. the “COVID years” of 2020 and 2021, for many businesses) are far less profitable. This uncertainty can make retirement planning difficult.
A key step here is to speak to a financial adviser about diversification. Try not to assume that your future retirement income rests upon your business continuing to generate revenue. Rather, consider how other asset classes can help to secure your future goals – e.g. shares and bonds held in ISAs and/or pensions.
#3 Pension organisation
As a business owner, you may have a wider choice of pension options compared to a pure employee (e.g. Small Self-Administered Schemes, or SSASs). Whilst this can open up more investment opportunities, it also adds complexity. Which pension(s) should you choose and how do you maximise the benefits to help you achieve your retirement goals?
A good step here is to talk to a financial adviser about selecting an understandable pension scheme to which you can divert specific business profit (e.g. a low-cost personal pension). This can then widen opportunities for tax planning. For instance, employer contributions to a workplace scheme can be listed as tax-deductible expenses provided these are wholly and exclusively for the purposes of trade.
#4 Surplus cash management
Many business owners wisely keep a store of cash, ready to invest in capital projects (when suitable opportunities arise) and to provide a safety net if revenues fall in the future, perhaps due to economic challenges. It can be difficult to know where to “park” these cash assets in a way that minimises tax whilst maximising returns (cash interest rates may not beat inflation).
Corporate investments can be a tax-efficient solution for company directors – possibly allowing for better terms on capital gains tax (e.g. deferral) whilst opening opportunities to generate higher returns from shares and/or bonds. If constructed carefully, corporate investment accounts can also keep these investments accessible if the business needs them.
#5 Streamlining assets
Whilst some business owners have their wealth largely tied up with their business, others have a highly complex asset base. Perhaps they own multiple businesses whilst holding properties, shares, bonds, cash and collectables. Here, the challenge is deciding how to optimise each asset and income stream in light of your retirement goals.
A financial adviser can be just the person to sift through this complicated picture of wealth and highlight their interconnections, risks and opportunities to the business owner. This process can reveal “weak points” in the asset base which need addressing (e.g. liquidity or diversification risk) whilst potentially illuminating areas of improvement – such as streamlining the investment management process.
Invitation
An important note to finish on is business valuation. Many business owners have little/no idea about what their business is worth until the process of sale (or “dispersal”) starts. In general, owners tend to overestimate what their business is worth.
This can lead to unpleasant surprises later when approaching third-party sellers who may not be willing to pay the initial asking price. Since your business is likely to form an important part of your asset base when approaching retirement, it is important to have realistic expectations and to plan for different scenarios involving your business sale. Could you still achieve your retirement goals, for instance, if you end up selling for less than you hope for?
A financial adviser can be very helpful in helping you identify these sorts of important questions to ask yourself and work through them with the best possible information.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
