Your Business Isn’t Your Pension
Why Your Business Isn’t Your Pension and What to Do About It
Introduction
In today’s fast-paced and unpredictable world, many entrepreneurs view their business as their primary source of retirement income. However, relying solely on selling your business or keeping it to generate income can be risky and may not provide the ideal financial security for your retirement years. In this blog, we will discuss the potential pitfalls of depending on your business as your pension and explore alternative strategies to secure a comfortable retirement.
I know you’re just starting out in business, so you might be wondering why I’m mentioning this now. By the time your business starts to flourish, many of you won’t have the time to think beyond the day-to-day running of it. It’s important for me to bring this to your attention now, and you keep it in mind. I’ve seen too many people think about these things too late in life. When you start making enough profit that you’re deciding whether to take it as extra income or to reinvest it in the business, you could also choose between putting it away for retirement. Here’s why…
The Risks of Relying on Selling Your Business
- Market Volatility: The value of your business can fluctuate significantly due to changes in the market conditions, industry trends, or economic downturns. Depending on the timing of your retirement, you may be forced to sell your business during an unfavourable market, resulting in a lower sale price than anticipated.
- Business Succession Challenges: Transferring a business to a new owner or family member can be a complex process. Finding the right buyer who is willing to pay a fair price and maintain the business’s success can be challenging. Without a reliable succession plan, your retirement income could be at risk.
- Uncertain Business Performance: The future success of a business is never guaranteed. Factors such as increased competition, changing consumer preferences, or disruptive technologies can impact the profitability of your business. Relying solely on your business’s income for retirement without diversifying your investments exposes you to significant risk.
- Emotional Attachment: Selling a business that you have built and invested in can be emotionally challenging. It may be difficult to detach from the business and make objective decisions about its sale. Emotional factors can influence the timing and terms of the sale, potentially affecting the financial outcome.
- Tangible assets: It’s not always as saleable as you first think. I’ve had conversations with multiple people who ARE the business but still think they can sell their business. It might be true. But it’s often difficult to get someone to pay good money for your returning customers or ongoing income because it relies on you.
You might only be able to sell part of your business. If you’ve designed a particular product or service that’s patented or copyrighted, it’s probably easier to sell than your entire business. It might affect the value because you’re reducing what the buyer gets. But it could also make it more saleable because it reduces the new things an existing business has to deal with, it’s simpler.
- Risk to the new owner affects value: There is a risk to the new owner that they’re liable for your business activity. Suppose you’ve ever delivered a poor product quality or service, unresolved issues, and legal disputes. You might not have known about it at the time. Another risk for a business buyer is the discovery of non-compliance with regulatory requirements and governance practices. This can include violations of industry-specific regulations, failure to meet legal obligations, or inadequate internal control systems. Non-compliance can result in fines, legal liabilities, reputational damage, and even business closure. The risk affects the value and how readily someone will buy your business.
The Drawbacks of Keeping Your Business for Income
- Lack of Diversification: Keeping your business as your primary source of income limits your ability to diversify your investments. By relying solely on your business, you are exposing yourself to the performance and risks associated with a single asset. A diversified investment portfolio can help mitigate risks and provide stable income streams during retirement.
- Business Management Challenges: As you approach retirement age, you may desire a more relaxed lifestyle. However, running a business requires continuous dedication, management, and involvement. It may not be feasible or desirable for you to maintain an active role in your business during retirement. You might plan on getting someone else to run the business, but that relies on trusting someone who might move on to new employment.
What can you do to set yourself up for retirement?
- Get money out of your business. Use help from an accountant and/or financial planner. If your business isn’t saleable, then you need to think ahead to getting your money out. It might be possible to close your business and pay 10% tax to receive the funds for the business.
- Use pensions as a tax-efficient way of getting money out of the business. Pensions are a business expense if you have a limited company, so it will reduce profit and therefore the corporate tax bill. They have tax relief for various other business types (it’s too much for me to go into this here, so you’ll have to reach out for advice on how to take pension contributions tax efficiently).
- Getting money out of the business can also protect it. If you’re made bankrupt, your pension won’t be considered (unless you’re making pension contributions to deliberately avoid paying your creditors), whereas business assets would. In addition, if the business is sued and you’ve already taken the money out, it’s already ringfenced as being yours, not the business’s. Be careful not to take too much and use the money you need for cash flow.
You might need help from a financial adviser to tell you how much you can take out without going over your annual allowances. It’s possible to go back a few years using ‘carry forward’, but the rules around this can be complicated.
Take out money in a way that works for you, that could be little and often or lump sums just before your company’s year-end. A good financial planner will communicate with you before your company’s year-end to see if you can make additional contributions. Work with a professional who manages your cash flow.
- Diversify your assets. You don’t have to use pensions for this. You can take additional income specifically to buy other investments such as ISAs and properties. Don’t forget to reach out to a financial adviser for advice if you’re not sure which assets to invest in, and work with them to find out the tax rules to make sure you’re not paying too much in tax.
Did you know that you can buy a commercial property with your pension? These are really tax-efficient. That means you’ve got an asset in your pension that generates an income for you. While it’s running, your business can pay rent to the building in your pension. When your business closes, you can find a new tenant to carry on paying an income to your pension, or you could sell it. There would be no capital gains tax on the increase in value too.
- You could use your problem-solving skills to find a way to get around any of the above points. For example, some people have successfully managed to hand over control of running their business to someone else so that they can retire. I just wanted to point out that it’s not as simple as it might seem. Develop a comprehensive succession plan for your business to ensure a smooth transition and secure the business’s value for retirement. Explore who could run the business, especially if you’re willing to work in it part-time. This may involve identifying and lining up a successor, considering external buyers, or exploring employee ownership models.
I encourage you to explore the possibility of selling your business. I had some clients who owned a veterinary practice. They didn’t think they could find a buyer because their business was based out of a section of their home, and there was only one competitor in the area that could have relied on people switching services to them because there was no other option. They sold it for £2 million. Luckily, they did explore the sale of the business.
However, try to spread your risks. Take the example of my clients who sold their business. If that sale hadn’t happened, they would have already taken as much as possible out of the business and into their pension so that they had enough assets to live on. So, they had a plan B, which also made the sale of the business less important, which probably helped with their bargaining power. They were able to negotiate knowing that they had a variety of options.
Conclusion
While your business may be a valuable asset, relying solely on it for your retirement income can be risky. Market volatility, succession challenges, and uncertain business performance can jeopardise your financial security. By diversifying your investments, making pension contributions, planning for succession, and seeking professional advice, you can create a more robust financial plan for your retirement. Remember, your business should be part of your retirement strategy, but it’s risky if it’s your sole source of pension.
The value of an investment with St James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Only certain pensions can hold property and there are strict rules on what properly can be held and how.
For more information or to get in touch, here are my details:
Jamie Lowe
07469 712299
www.calendly.com/jamie-lowe-tsw
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True Self Wealth Ltd is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website http://www.sjp.co.uk/products
SJP Approved: 09/07/2025
