Building a business can be exciting and rewarding, and it might play a key role in ensuring you’re financially secure now and in the future. Yet, focusing all your attention on your business could mean you miss alternative ways to provide security later in life, including overlooking a pension.
Indeed, according to a January 2024 report in This Is Money, around half of business owners aren’t regularly contributing to a pension.
Many business owners may plan to use their business to create an income once they’re ready to step away from work. You may plan to sell your business to a third party and live off the proceeds, or remain a shareholder of the firm and take a dividend income.
While your business could provide for you in retirement, it isn’t always a reliable option, and it might not be the right one for you. Read on to find out why and discover how a pension could support your long-term financial security.
Your business might not deliver the retirement security you expect
Even if your business is thriving, there are some challenges you could encounter if you plan to use it to fund retirement.
The funds might not be readily accessible
While you might have enough money tied up in your business to fund retirement, it’s not always simple to access the money, especially if you plan to sell your company.
Finding the right buyer for your business can be a time-consuming and lengthy process. Delays may mean you need to push back your retirement date if you don’t have other assets you could use to create an income. This could be particularly challenging if changing circumstances, such as your health, mean you want to retire sooner than expected.
Selling your business for the “right” price isn’t guaranteed
Whether you plan to sell the business to a family member or need to find a buyer, you’ll often need to negotiate a price, and selling the firm for “enough” to support your retirement goals may not be guaranteed.
In some cases, a business owner might struggle to find a suitable buyer too. As a result, relying solely on your business could mean your retirement plans are uncertain.
So, even if you plan to use your business to support your later years, taking other steps to create a retirement income could help you feel more confident about your future.
The tax-efficient benefits of using a pension to save for your retirement
It’s important to remember that you can’t normally access the money saved in your pension until you reach retirement age, which is 55 (rising to 57 in 2028). So, if you’re saving for short-term goals, alternative options could be better suited to your needs.
However, if you’re thinking about your long-term financial security and how to create a retirement income, a pension could be an option worth considering for these five reasons.
1. Your pension contributions could benefit from tax relief
To encourage you to save for your retirement, your pension contributions will benefit from tax relief, providing a boost to your savings.
The amount of tax relief you receive usually depends on the rate of Income Tax you pay. So, if you pay Income Tax at the basic rate and want to increase your pension by £1,000, you’d only need to add £800 as your contribution would benefit from £200 of tax relief.
To boost your pension by £1,000, the amount you need to add as a higher- or additional-rate taxpayer is £600 and £550 respectively.
Your pension scheme will often claim tax relief at the basic rate on your behalf. However, you may need to complete a self-assessment tax return to claim your full entitlement if you’re a higher- or additional-rate taxpayer.
2. Your pension contributions are often invested
Normally, the money you place in a pension is invested. This provides an opportunity for the value of your pension to rise over the long term.
As your pension contributions may remain invested for decades, the compounding effect could mean your initial contribution has significantly increased by the time you retire.
Of course, investment returns cannot be guaranteed and it’s important to weigh up what level of financial risk is appropriate for you. However, historically, financial markets have delivered returns over a long-term time frame.
3. Investments held in a pension are not liable for Capital Gains Tax
Returns from investments that you don’t hold in a tax-efficient wrapper may be liable for Capital Gains Tax (CGT).
Fortunately, investing in a pension means your returns won’t be liable for CGT. So, if you’re investing for the long term, a pension could offer a way to mitigate a potential tax bill.
4. Contributing to your pension could reduce your business’s tax bill
Employer pension contributions are often an “allowable expense”. This means your business could deduct contributions to your pension for Corporation Tax purposes, which might reduce your business’s overall tax bill.
Tax treatment varies and is subject to change. If you’d like help understanding how you could balance retirement planning with your firm’s finances, please get in touch.
5. Separate your business and personal finances
For some business owners, separating your personal finances and those of your firm could be useful.
Using a pension to save for retirement might offer you some security – even if the circumstances of the business or personal goals change, you may have a safety net to fall back on should you need to. For example, if ill health means you want to retire earlier than expected, having a pension, rather than relying solely on your business, could provide you with more freedom to choose what’s right for you.
We could help you create a long-term financial plan
As financial planners, we could help you build a long-term financial plan that considers your goals and circumstances, including using your business to support your aspirations. Please get in touch to arrange a meeting with one of our team.
Please note:
This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. 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 performance.
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.
