What are the benefits of a pension for business owners?

Pensions are not always popular with business owners. Only about a third have a pension at all, with many business owners choosing instead to rely on their businesses to fund their lives in retirement. But shunning pensions does mean missing out on some pretty significant tax benefits that could make a big difference to the amount of money you have in the future. And having all your eggs in one basket can be a risky strategy too. This article weighs up the benefits of pensions for business owners.

Don’t miss out on pension tax breaks

Because the Government wants people to save for their retirement, pensions come with significant tax breaks. These are fairly well known for individuals: pension contributions up to your annual allowance (as much as you earn each year, usually up to £40,000) receive tax relief of 20-45% depending on how much Income Tax you pay. But there are big advantages for business owners too:

 

  • If you own a limited company, pension contributions can be treated as an allowable business expense, helping offset your company’s corporation tax bill
  • Pension contributions can be a tax-efficient way to take money from your business
  • If you are planning to sell your business to fund your retirement, making the most of pension allowances is wise because they can help reduce Capital Gains Tax when your company is sold

Should you put all your eggs in one basket?

Business owners are often much more comfortable investing in their own business than trusting others to invest on their behalf. They know their company and industry inside out so on the face of it, this makes sense. But as with any investment, it is rarely sensible to put all your eggs in one basket.

You never really know what is going to happen with your business in the future. As an example, the market may go against you. If it does, and you don’t have a pension or other investments, you’ll compromise your future lifestyle. And what will happen if you get ill in the future? You may need to sell your business earlier than expected and give up work. You may also have to sell your business for less than expected. With a pension or other forms of retirement saving, you would be less vulnerable.

Getting the best from a pension

We speak to many business owners who have been put off pensions by a bad experience – they’ve paid high charges and ended up with mediocre returns. That’s where financial advice can more than pay for itself. A good financial planner with experience of working with business owners can work with you to construct a pension that helps you make the most of the tax benefits and investment opportunities while also taking into account your individual attitude to investment risk.

A good financial planner can also work with you on your exit plan, helping you understand when you can realistically retire. We use cashflow modelling to create a visual illustration of what your future finances could look like. As an example, we can take into account the proceeds from your business sale as well as your other assets and expenditure to forecast your future income. And we can help transfer business wealth into personal wealth, making sure your assets are structured in the most tax-efficient way.

Tilney can help you

We have a nationwide team of financial planners at Tilney who are experienced at helping business owners. Working alongside any other business advisers you have, we can help you make the most of finances.

Why not book an initial consultation to find out how we can help you? It won’t cost you anything and there is no obligation to take any of our services.

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