Wealth-planning considerations for board members

If you’re close to retirement, stepping down from a senior executive role doesn’t automatically mean an end to your working life.

In fact, many executives transition to retirement by taking up non–executive director (NED) and/or board roles with other companies – often building up a portfolio of positions in the process.

“When former executives take on these roles, there are typically three P’s that influence the decision: passion, philanthropy and pay, and the focus tends to be on the first two,” explains Nick Ritchie, senior director of Wealth Planning at RBC Wealth Management in the British Isles. “By the time they step into these roles, most executives have enough wealth set aside for a comfortable retirement. Pay is less of a motivation and they now have an opportunity to become involved in businesses they are passionate about or that align with their societal or philanthropic ambitions.”

You may want to support startups, or you may look for board positions in the charitable or third sector. In this new phase of your life, you can align your interests and values with an organisation’s goals; network with influential leaders; move into new and exciting sectors and explore investment opportunities.

Wealth planning for multiple income streams

While many individuals in the position of building a directorship portfolio have already created significant wealth, it’s still critical to have wealth-planning and cash-flow discussions during this period.

The nature of your remuneration often changes in a directorship role, and it’s important to understand any changes to:

• Regular monthly salary
• Annual (or regular) bonus/compensation
• Pension contributions
• Workplace benefits and incentives, such as healthcare and critical-illness insurance

“There is usually a big transition from a regular salary, bonus and traditional compensation structure to a gap where there is no income while executives are having conversations about NED or board roles,” says Lucy Day, director for RBC Wealth Management in the British Isles. “Even if they have roles lined up, their total compensation is going to be significantly lower than before.”

This is highlighted by figures from Deloitte, which show the estimated median total compensation package for a FTSE 100 CEO in 2021 as £3,620,000, with the figure for FTSE 250 CEOs standing at £1,790,000 (figures for CFOs at FTSE 100 and FTSE 250 firms stood at £2,220,000 and £990,000, respectively). Comparatively, the median estimated fee paid to board chairs of FTSE 100 companies was lower, at £425,000, with the base fee paid to NEDs even more so, at £75,000.¹

Mind the gap: Median annual total pay per role at FTSE 100 companies in 2021

“So, if they have six or 12 months during which they haven’t found any roles, or if they do have roles but the income is lower, where are they drawing their income from?” asks Ritchie. “It’s possible that some may have deferred compensation from their existing role, but is that enough to maintain the standard of living they and their family have grown accustomed to? Are they going to need to draw on other assets and are those assets set up to do that efficiently? These are the sorts of conversations you want to have as much in advance as possible.”

The picture can become even more convoluted once you start taking on director roles and managing income streams from different companies. You may also be expected to invest in the business, which will place demands on your capital.

For those working with early-stage businesses, there is the possibility of taking “sweat equity” (shares in the business in lieu of salary), which comes with a number of potential issues, such as tax implications when realising an exit.

“Different types of income streams received from different businesses creates a whole set of questions,” says Smith. “What will total income be, relative to expenditure? How will your tax position be affected? What are the broader implications with regards to eventual retirement?”

Full retirement and succession planning: What to consider

As much as it is important for NED or board members to consider their financial position while they are applying for and serving in these roles, it’s also vital to think about how these roles might impact retirement and succession-planning arrangements.

Pensions are a perfect example. Once you reach the adjusted income threshold (currently £260,000 for the tax year 2023–2024), tax relief on contributions starts to be reduced in line with the tapered annual allowance. “Imagine a scenario where someone has different roles that each come with access to their own pension scheme,” says Ritchie. “It can create an administrative headache and might be worth having a discussion about taking salary in lieu of a pension.”

NED or board members might take the opportunity to consolidate pensions to simplify their affairs ahead of full retirement. They may also wish to explore other tax efficient ways to save surplus earnings.

For example, if you’re buying into a new company, such as a startup business, and are expecting an exit down the line, you may choose to put some of those shares into a trust to benefit future generations. If you’ve already created enough wealth to meet your needs in retirement and have surplus income, you may even be able to put all your income from your new role(s) into a trust.

“Ultimately, as with any major change in your financial situation, there are lots of moving parts to consider, so it’s worth going back to basics,” says Smith. “Not just wealth planning while in those new and exciting director roles, but also ensuring that retirement plans remain fit for purpose.” On the latter point, this would typically involve working out how much you need in order to retire, by using cash-flow modelling.

As always, the value of regular financial reviews can’t be understated, not least because personal circumstances can change, along with rules and regulations around financial products and taxation.

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¹ “Your Guide – Directors’ remuneration in FTSE 100 companies.” Deloitte, 2022, https://www2.deloitte.com/uk/en/pages/tax/articles/directors-remuneration-in-ftse-100-companies-oct-2021.html .

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