Personal Finance
My Business is My Pension
Owners of small businesses are occasionally unconvinced by the merits of pensions. ‘My business is my pension’ is a common refrain but is it a sensible financial planning strategy?
There are, of course, a number of advantages to re-investing company profits to grow a business, particularly where you can see significant growth potential. The sense of excitement and control over your own destiny are also powerful drivers. But in order to realise the value in your business, and ultimately retire, a suitable buyer will need to be found who is both willing and able to pay the right price, and at the right time. That isn’t always easy.
Furthermore, if anything were to go wrong with your business, for whatever reason, you could end up losing everything, including your hard-earned, comfortable retirement.
So, how might pensions help?
The table above compares the net personal benefit of a £40,000 profit to a controlling director of a small limited company. It compares three different forms of remuneration: a bonus, a dividend payment and a pension contribution.
Pension funds cannot be accessed until age 55 at the earliest. However, under new rules announced in this year’s budget, after this point you have free access, with 25% of any withdrawal being tax free and the remainder being subject to your marginal rate of income tax at that time. It may be possible, through careful planning, to utilise the £10,000 income tax personal allowance and basic rate tax band to receive up to £36,000 of the initial £40,000 profit as a personal net benefit.
Pensions can also be highly flexible in terms of investment. SIPP and SSAS (Small Self-Administered Schemes) can normally invest in land and commercial property, including your own business premises. Paying rent from your business to your own pension fund is a commonly-used strategy. SIPP and SSAS can also borrow up to 50% of the fund value for a commercial purpose and SSAS can even make loans to, and purchase shares in, a connected employer.
In summary, pensions can now offer a very efficient way to extract company profits. They can also be an excellent business tool and an alternative source of finance. Most importantly they can diversify the risk of having all your eggs in your business basket.
If you’re interested in knowing more - why not give Ian Thomas a call on 01803 839 194? Alternatively, send him an email at ian@pilotfinancialplanning.co.uk. He’d love to hear from you!
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
By the Dart August 2014