Why selling your business should not be your only exit strategy.

Written by Jono Randell-Nash, Independent Financial Advisor

In many ways, having a business can feel like having a child – it takes a huge investment of your time, love and energy in the short term, and in return you feel a rollercoaster of epic highs and lows, and a sense of pride and accomplishment. 

You should always have an eye on the future, and how you can protect it, and how it can look after you in years to come. 

BUT…treating your business as your pension is a dangerous game. With so many uncertainties in the world, broader contingency planning is wise to ensure you can retire in a way that works for you, however the profitability of your business is impacted in the future. And, the earlier you consider what retirement looks like to you, the better equipped you will be to make the transition. 

Selling your business is an excellent strategy for financial independence, but it shouldn’t be your only plan

As a business owner, you might think that retirement planning isn’t necessary for you. Maybe you’re planning to fund your retirement with the sale, or succession of your business. While that may be one option, there are a number of risks attached which require careful consideration. In particular:

• Uncertainty of timing a sale: When you come to sell, you could receive less than you expected, not be able to find a buyer, or have to postpone your retirement, all because of unfavourable market conditions.

• Lack of tax efficiency: If you sell your company, as well as the proceeds being outside any tax efficient wrappers such as ISAs, you are no longer likely to receive business relief from inheritance tax. 

• Concentration risk: You may be overly reliant on your business, any premises or building, perhaps both for your retirement income, and therefore exposed to one or two circumstances conspiring against you.

• Access to retirement income: If you intend to step back from the business and draw a retirement income from it rather than sell it, you will have to rely on those who take it on to continue its success. They might not be best placed to run it and/or you might feel a need to remain involved.

• Leaving a legacy: The business will need to remain financially stable in order for those you leave behind to draw a regular income from it. They might not be equipped or interested in running the business, and your business might not be as valuable without you.

You might want to consider a back-up plan. Employer contributions into a personal pension can be a valuable and straightforward way to diversify your plan to give you more certainty in retirement, in a tax efficient way.

Ok, so what could this actually look like for me?

You can build up a retirement pot of over £1,000,000, generating an income of £70,000 a year gross, £49,649.68 a year net (based on 2023/2024 tax rates) from age 68 to 96 by making an employer contribution of £1,000 a month (before tax) from age 40 to 68*. 

The tax breaks you get for paying into a pension make it a very efficient use of your turnover. If instead of a pension contribution you paid yourself dividends and kept an income with that £1,000, after 19% corporation tax and then dividend tax you’d only keep**:

💰 £739.10 - Basic rate taxpayer

💰 £536.60 - Higher rate taxpayer 

💰 £491.30 - Additional rate taxpayer 

Life isn’t usually as simple as maximising your pension contributions, as you have to balance this with your current lifestyle & usual expenditure, comply with the wholly and exclusively test, you need sufficient profit that year and stay within the annual allowance, but it makes you think, right?

* Assuming annual charges of 0.75%, assumed growth rate of 5.8% for the fund (adjusted to account for 2% inflation)

** Assuming profits of £50,000, a corporation tax rate of 19% and based on dividend tax rates of 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers – after utilising dividend allowance

Based on expected 2023/24 tax rates, as at 20 March 2023

The target income shown is an annual figure accounting for inflation of 2% each year.

This is based on a corporation tax of 19%, so the savings will only increase if the corporation tax rate is higher, as companies from the 1st April 2023 will pay corporation tax between 19% and 25% depending on profits.

What should you do next?

The sale of your business can (and probably should) form part of your retirement plans. 

It’s easy to set up a pension, anyone can do it themselves.

But if you want advice on which provider, the right level of risk to take, the best providers, advice on the underlying investments types and how it fits into the bigger picture with your finances, you may want to consider speaking to an independent financial adviser.

If you think that might be me, or if you have any questions about any of this, I’d love to hear from you: jono.randell-nash@mwafinancial.co.uk, 07837 010181, or www.linkedin.com/in/jono-randell-nash.

I don’t charge for initial meetings and there’s no obligation to proceed.

Notices

As I provide regulated financial advice, please note the following caveats that regulation requires I include:

• The Financial Conduct Authority do not regulate tax planning, estate planning or cash flow planning.

• A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

Jono Randell-Nash

ABOUT THE AUTHOR

Jono is an independent financial adviser at MWA Financial Advice and non-practising solicitor, having previously spent ten years in the legal profession. He has recently joined MWA as a self-employed consultant.

Jono’s aim is to provide support, guidance and advice to help people achieve their goals and ambitions, particularly planning for a comfortable retirement. He understands that every individual is different and takes pride in taking the time to get to know every client and their individual needs.

Jono specialises in advising business owners across a wide variety of sectors, as well as legal professionals.

Come and connect with me on:

LinkedIn: Jono Randell-Nash

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