Can your Business REALLY be your pension?
Business Owners Essential Financial Top Tips
‘Helping you make wise money decisions to reap the rewards of your success’
I come across too many business owners working well beyond the age they thought they would stop
because they directed all of their capital into their business thinking it would support them in the future.
Your business is great. You are no doubt a success. But putting all your eggs in one basket is a very risky
strategy. There are many variables which will influence not only the price you receive for your business,
but also the timing of any sale which may not tie up with your plans.
As a business owner you are in a unique position, you can control the cash flow within your company,
and the level of salary and dividends you receive. The efficient management of these three elements
means you can keep the business doing well and provide for you, your family and your future, combating
the risks described above.
What to do with excess cash
If you hold excess cash within your business which is not needed it could be used to:
A) Diversify your investments
B) Improve the growth of your combined business and personal wealth.
Don’t put all your eggs in one basket
A basic principle of good investment management is to diversify across different asset classes (such as
bonds, equities, and property), different sectors (i.e. utilities, technology, commodities) and different
geographies (UK, Europe, USA, Emerging markets etc). Correct diversification is scientifically proven to
lower the risk of overall investment returns and maximise growth for the level of risk taken.
Create more wealth and more freedom
Picture this:
Your business is sold and for tax purposes the gain is valued at £2,000,000.
You are eligible for Entrepreneurs relief on all of the gain, so you are taxed at 10%.
In your pocket, after tax you have £1,800,000.
For the last 10 years you held £500,000 of excess cash within the company.
What could you have done to increase the £1,800,000 in your pocket?
1)
10 Years ago you took the £500,000 excess cash out of the business
You invested it and it grew at a modest 3% per year
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You sold this investment and your business (Business now worth £1,500,000 before tax)
You’re a higher rate taxpayer in the year of sale, and had no other capital gains in the same year
After tax the total proceeds from your business and investment are £1,976,917.
£176,917 more than if you’d only used your business.
2)
10 Years ago you started taking excess cash out of the business
You made full use of your carry-forward and annual allowance to put £500,000 over the course of
three years into your personal pension (annual allowance was much more generous in the past),
and it grew at a modest 3% per year
You were a higher rate taxpayer when the contributions were made AND when taking an income
from it (giving a worse picture than if you become a basic rate taxpayer)
You take 25% of your pension fund as tax free cash
You take an income from the fund for 35 years until your retirement is over
After tax the total proceeds from your business and pension are £2,133,951.
A staggering £333,951 more money in your pocket.
Having placed that £500,000 into an investment gave you one thing more important than money per se. It
gave you options, it gave you freedom. It meant that you did not have to rely only on selling your business
to be able to have a secure future; it meant that you could stop work when you chose.
Every person, like every business, and every financial plan is unique. However, I hope this gives you food
for thought that maybe it’s time to branch out and consider other avenues than just your business as your
pension.
About the author
Sarah Harragan is a Chartered and Certified Financial Planner who has worked with successful business
owners and their families since 2006.
She has been a recipient of national financial planning awards and quoted in national financial press, and
is proud to be a 100% Independent Financial Adviser in a Chartered Firm.
Sarah and the Grangewood team provide the solutions and ongoing investment management and
financial planning which ensures their clients successfully align their business with their own lifestyle
dreams to achieve what they want, when they want it.
Grangewood Financial Management Limited, Heybridge Business Centre, 110 The Causeway, Maldon, Essex, CM9 4ND.
Authorised and Regulated by the Financial Conduct Authority.
If you would like to contact Sarah please feel free to email [email protected] twitter @sarahharragan
Linkedin sarah-harragan visit our website www.gwfm.co.uk or call 01621 856545
The contents of this guide do not constitute advice and should not be taken as a recommendation to purchase or invest in
any of the products mentioned. Before taking any decisions we recommend that you seek professional investment Advice.
Copyright Grangewood Financial Management.
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