3 important reasons why your business is not your pension

When you are running a business, you can end up putting all your energy into carefully managing your company’s finances, while inadvertently neglecting your own.

As a result of this, you can find that although your company has a healthy balance sheet, your personal wealth suffers. This can have a knock-on effect in later life, especially when you retire, because your entire net worth is wrapped up in your business.

This may not bother you, as you might envisage using your business to provide for your life in retirement and, to all intents and purposes, see as it as your pension. For example, you might be considering:

• Selling your business to a third-party buyer and living on the proceeds
• Remaining as a shareholder and receiving dividend income
• Working in some capacity and continuing to draw a salaried income
• A combination of the above.

However, while these are certainly options for deriving an income in retirement, this does not necessarily make your business your pension. Indeed, saving a portion of your wealth throughout your time running your company can be a sensible move.

That way, you can reap the benefits of both building a business, as well as the tax-efficient advantages of pension saving.

Read on to find out three reasons why your business is not your pension, and how saving into a dedicated retirement fund could help you achieve your ideal lifestyle later down the line.

1. You will need to sell your business to access the entire value within it

First and foremost, if your intention is to live on the value contained within your business, you will need to sell it to a buyer. This could be to a third party, someone who is already involved in the company, or perhaps even a family member.

Either way, to access the entire value wrapped in your company, you will need to find a willing buyer and agree a purchase – assuming you can find the right buyer at an appropriate time.

This creates a degree of uncertainty as to when you will be able to access the money you are relying on to fund your retirement lifestyle.

Meanwhile, you will typically be able to access your pension from the normal minimum pension age. In 2023/24, this is 55, set to rise to 57 in 2028.

From that point, you can start to draw from your pot. You can also take the first 25% of your fund tax-free, either as a lump sum or in multiple, tax-efficient withdrawals.

Although the age at which you can access your pension may increase further in future, there will still be a definitive point when you will be able to make use of the funds you have paid in.

2. You might not get what you want from a sale

Assuming you do find a buyer for your business, you are also reliant on them being willing to pay a price for your company that gives you what you need to fund your lifestyle.

You can set a price for the business that would be sustainable for supporting you in later life. However, a buyer might consider various aspects of the company and decide that what you are asking for is too much. For example, they might look at:

• Your cash flow
• The management structure, and how integral you are to the business’s day-to-day functioning
• How much debt there is in the business.

If any of these aspects lead them to think that the price is too high, you could be forced to search for another buyer entirely. Or you may end up taking a lower price, which could affect the lifestyle you are ultimately able to afford.

By contrast, you can keep a close eye on the value of your pension over time. You can see what it is worth now and forecast what it might be worth down the line, depending on what you contribute to it and assumptions around investment growth.

Bear in mind that your pension investments will likely fluctuate in value over time, and you could get back less than you invest. The income you can draw may be affected by market performance at the time you come to do so.

That said, you are able to keep an eye on the value of your fund over time and, by retirement, have a clearer idea of what you will have to fund your lifestyle. You can then make informed decisions over what to take and how much, depending on market circumstances.

3. Pensions come with various benefits that your business may not

The final key reason that your business is not your pension is simple: pensions can offer useful benefits for retirement planning that your company cannot.

For one, the money in your pension is invested in a range of assets. As a result, your pension wealth has the potential to grow in value over time, helping it to keep up with and even exceed the rising cost of living.

Although you are somewhat dependent on market performance, this can help to ensure that your money has sufficient spending power in later life.

Pensions are also highly tax efficient. You can receive tax relief on your contributions up to the Annual Allowance (£60,000 or 100% of your earnings in the 2023/24 tax year), meaning that a £100 contribution technically only “costs”:

• £80 for basic-rate taxpayers
• £60 for higher-rate taxpayers
• £55 for additional-rate taxpayers.

Bear in mind that your Annual Allowance may be reduced if you have high earnings, totalled from your business and anywhere else, or if you have already flexibly accessed your pension.

Furthermore, any interest or investment returns generated by your pot are entirely free from Income Tax and Capital Gains Tax (CGT) and, as discussed above, you will be able to access the first 25% of your pot tax-free.

In fact, pensions are so tax-efficient that you might even be able to reduce your business’s tax bill by saving into one. That is because employer pension contributions – which is what your contributions would count as – are considered “allowable expenses” and so are tax-deductible for Corporation Tax purposes.

That means you might also be able to reduce your Corporation Tax liability while running your business, as well as making the most of these other tax-efficient advantages.

While your business has growth potential based on its performance, it does not come with these same tax-efficient advantages.

So, you could complement your business’s ability to increase in value over time with pension contributions, potentially reducing your tax bill while building a separate pot to draw from in later life.

Get in touch

Need support managing your wealth as a business owner? We can help at Rosebridge.

Email enquiries@rosebridgeltd.com or call 01204 300010 to speak to an experienced professional today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.