If you’re a business owner, your company is likely to be one of your biggest assets. It’s also likely to be one of your main priorities, main stresses, and where you spend a great proportion of your time and effort.
Having poured so much passion and energy into your business, you will want to reap the benefits from it in the future when you decide to step back and retire.
Many entrepreneurs see their pensions as their source of future income. Indeed, IFA Magazine reports that just 340,000 out of the 4.24 million self-employed people in the UK contribute to a pension.
You may be planning to fund your retirement through selling your business, or from drawing income from it if you plan to keep working.
However, making separate pension provision – and not treating your business as your pension – can have significant benefits. Read on to find out what these are.
There are significant tax benefits
Pensions are one of the most tax-efficient ways that you can save for the future. And, if you own your own business, it can also help to reduce your tax bill.
The tax benefits of pension contributions are different depending on whether you’re a sole trader, part of a partnership, or a business owner.
Sole trader or partnership
If you’re a sole trader or part of a partnership, you can make personal contributions to your pension, and these will qualify for generous tax relief.
Your contributions will benefit from tax relief at 20%, meaning that a £100 contribution essentially only “costs” you £80.
If you pay higher- or additional-rate Income Tax you can also claim an additional 20% or 25% tax relief through your self-assessment.
The amount you can contribute to a pension without triggering a tax charge is limited by the Annual Allowance. This is £60,000 for most people, but may be lower if you’re a higher earner or you have already started drawing flexibly from a pension.
Your contributions are usually also limited to 100% of your earnings, although you can make use of any unused Annual Allowance from the previous three years.
Business owner
If you own a limited company, you can make employer contributions to your pension from your company account.
You can normally treat these contributions as an allowable business expense and offset them against your Corporation Tax bill.
Additionally, you won’t pay employer or employee National Insurance on the contribution.
Employer contributions are not limited by earnings but are still subject to the Annual Allowance as above.
You can also make personal pension contributions if you own a limited company, but it might not always be the most tax-efficient option. Your personal contributions will be limited by the Annual Allowance as above.
Relying on your business can be risky
One of the key tenets of successful investing is “diversification”.
That means investing (and that includes pension contributions) in a wide range of companies, sectors, and geographical areas. If one area performs poorly, others might fare better and can help to balance out or compensate for these losses.
Diversification can reduce the overall risk of your investments.
If your entire retirement “fund” is tied up in your business, this increases the risk. If your business doesn’t grow as you plan, or your trading is poor just before you retire, you have nothing else to fall back on.
This could mean you have to accept less than you need when you sell your business, and it may mean you have to compromise on your lifestyle. Or, you may have to work for longer.
Contributing to a pension means you will benefit from a broad mix of assets and investments making up your future nest egg. You don’t have to stake everything on the sale of your business.
Pensions are not a lot of work
Running your business can require a lot of effort and time. A survey by Startups reveals that entrepreneurs are working an average of 50.5 hours a week, compared to the UK average of 37 hours.
Additionally, how do you know you will be able to step away from the business when you want to?
Finding a seller can take years, and you may not receive as much as you hope for when you sell. You may have to keep working at a time your health dictates you no longer can, or be forced to continue when things are not going as planned.
Having a pension means you can step back from the business on your own terms.
And, while you’re accumulating wealth, it doesn’t take you 50 hours a week to manage. Indeed, working with a financial planner means they can help to take a lot of pressure away from you. You can get on with running and growing your business while they can help you to reach your retirement goals.
Get in touch
We specialise in working with business owners to help them to achieve the retirement they want, on their terms.
To find out how we can help you, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
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 not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
