To achieve success, business owners often devote most of their time and energy to securing the future of their companies. When it comes to their personal financial futures, many have found their attention focused elsewhere. As a result some business owners may be unaware of just how much preparation and planning it takes to ensure a comfortable life in retirement.
“Business owners tend to pride themselves on being in control and aware of business trends, but tend to overlook things on the personal front,” says John Younger at RBC Wealth Management in London.
“It is this focus on the business that leads to a lack of preparation for life after work, says Dion Lindskog, head of wealth structuring at RBC Wealth Management in London. “For most business owners, they say their business is their pension, so they are totally reliant on selling their business to pay for retirement.”
While selling the business might be the solution, the concern is that those without a clear wealth plan could find themselves working longer or living more frugally in retirement than they had hoped. "Some business owners never plan to stop working, but the prudent advice is that you need to prepare for possible retirement,” Younger says.
Plan for a future beyond the business
For some, retirement may be an unexpected decision, prompted by family or business events or even health reasons. It’s this uncertainty that makes early planning essential to understand what retirement might mean for you and your business. This includes making decisions on whether, and when, the business will be sold or transferred, in addition to plans for setting money aside for yourself, your family and any philanthropic intentions.
Given that many people want to maintain the same lifestyle in retirement as in their working life, income needs can often increase during the early years after finishing work as people go on holiday while they are still physically active.
“It is about structuring your assets so they pay for the lifestyle you want,” Lindskog says. Depending on which arrangements are already in place – such as salary and bonus packages, share schemes, complex deferred compensation schemes, as well as life insurance and medical plans – making the most of your assets is not always a straightforward process.
But as a first step, Lindskog says business owners should consider setting up their own pension plan, just as they would for their employees. Pensions are frequently a small component of an overall wealth package, but this does not mean they should be overlooked. Indeed, it’s important to understand how they work and use them where appropriate.
“Many people are financially well off and don’t need their pension benefits, therefore they think they don’t have to worry about it. But what they don’t think about is that they can use them to help their family,” says Lindskog. While the business might be the primary source of wealth, Lindskog says it is wise to have at least two options: the business and a pension on the side.
In certain pension arrangements, such as small self-administered schemes (SSASs), it is possible to buy bricks and mortar commercial property that can provide an attractive income stream. The scheme can also provide loans to the business, which can be beneficial if bank lending is not available.
Within a family business, however, selling up to fund retirement is not always an option. For example, you might choose to transfer or gift the company to a child or other family member, with the option to retain shares or draw income as an employee or consultant to help fund your retirement.
But not all children might want to continue with the family business, triggering further conversations around wealth transfer and succession planning.
In addition Lindskog warns, "Sometimes the business isn't going to provide the level of income you need, so you can end up with people having to work far longer than they'd ideally like to. You end up with a very disappointing retirement."
Make use of all your options
Retirement planning means taking a holistic view of your financial affairs to try to anticipate any future problems and how they can be solved. Three key questions to consider are:
- Will my assets provide the income I need to fund the lifestyle I desire?
- Do I need to take a higher level of investment risk than anticipated to maintain my lifestyle?
- How can I pass my remaining assets to my chosen beneficiaries efficiently on my death?
When creating a retirement plan, Lindskog likens it to orienteering; starting with where you are in your life right now, where you want to be when you stop working, and then determining if there will be any essential or desired stops along the way. The outcome will be a financial plan customised to your specific needs.
Regardless of circumstances, everyone should try to take full advantage of the available wrappers and allowances available to them, Lindskog says, starting with pensions and Individual Savings Accounts (ISAs). Additional options, depending on circumstances and attitude to risk, could include enterprise investment schemes, venture capital trusts and property investments.
Even for high earners, using all of the available allowances and reliefs is not only shrewd, but can make a big difference over time. Spreading wealth across a range of different savings vehicles has its benefits, such as a degree of diversification. But the real advantage is that each one can be accessed at a different point in time to provide income when needed. When it comes to retirement income, “it’s about knowing which taps to open and when,” says Lindskog.
Leaving a legacy
Planning for life after work is not simply about covering living and leisure costs. For many people, it also means leaving a legacy, perhaps to the next generation or to a charity, which is an important factor to be considered.
“The reality is you often have more than enough money to fund retirement, so the real question is what you want to pass to your children and what your attitude might be to charities or philanthropic causes,” Lindskog says. This can include structuring your wealth in preparation for leaving it to the next generation as well as arranging for gifts and donations to be made during your lifetime and upon death.
In these ways retirement planning, even for the wealthy, can reap rewards. As no-one can put a price on the peace of mind that comes from knowing that you and your heirs are well provided for and that your legacy lives on.