As a business owner, it’s easy to get caught up in the exciting and rewarding day-to-day work. But while people who have made sufficient contributions are entitled to a State Pension, it’s always wise to think about your retirement—and sooner.
Can my business be my pension? That’s a common question for many small business owners, considering whether or not to set up a pension or whether to rely on selling their business when the time comes to retire.
The simple answer is yes, your business could fund your retirement. However, if you plan to rely solely on the business for your retirement pot, there are several reasons why this isn’t necessarily the best idea. Not to mention, there are substantial benefits you could miss out on. Here’s everything you should know.
Can You Rely On Your Business as Your Pension Pot?
A pension provides you with regular income in retirement. It offers you the option to work less or stop working entirely—either deliberately or for health reasons.
If you’re self-employed, it’s up to you to save money you can use when you retire. However, according to studies, only about 31% of the self-employed workforce, which includes small and medium-sized enterprise owners (SMEs), pay into a pension.
While it’s possible to sell your business or use its profits as a source of retirement income, if that’s your only long-term plan, there are several serious risks you should know and consider.
Why You Shouldn’t Rely On Your Business For Your Retirement
First, and perhaps most obviously, running a business carries uncertainties. From market fluctuations and increasing competition to customer loss and personal health issues, you’re exposing your retirement plans to these volatile variables.
…even if your business is thriving at the moment, it’s tremendously risky to place all your eggs into a single basket.
So, even if your business is thriving at the moment, it’s tremendously risky to place all your eggs into a single basket.
SME owners also tend to overestimate their business’s worth. Basing your post-work plans on imagined valuation can be misleading and may not yield the return you’re hoping for. It’s good practice to assess your risk when choosing a pension plan.
Timing is another factor worth mulling. If your business doesn’t sell immediately when you need to, you might be looking at a longer working period than initially planned.
According to Companies House stats, at least one in ten company directors continue to work beyond their retirement age. One primary contributing factor is their choice not to save earlier. Instead, they opted to reinvest their profits into their enterprise.
Granted, as the owner, there are various strategies you can employ to minimise, even avoid, these risks. Still, there are too many perilous factors that would be outside your control.
What Are the Benefits of Having a Pension as a Business Owner?
The good thing about being a business owner is that you don’t need to rely on an employer for your pension plans. More than having an “income” in your later years, you get more freedom in choosing your retirement schemes or providers.
Here are the other financial perks you can enjoy:
Entrepreneurs understand the importance of tax efficiency. If you’re self-employed and saving for a personal pension, the government will add tax breaks on your payments.
If you’re self-employed and saving for a personal pension, the government will add tax breaks on your payments.
This tax relief typically goes up to 20%, so if you’re contributing £100 into your pension fund, you only need to put £80 and the government will cover the £20.
Higher-rate taxpayers (when you exceed a certain income threshold) receive more tax relief benefits. Besides the basic 20% break, you can claim an extra percentage off your tax liabilities, reducing your bill further.
Limited Company Pension Contributions
If you’re paying pension from your limited company (Ltd), neither you nor your company will have to pay National Insurance. And because your contributions come from your company income as a business expense, you’ll pay less corporate tax.
Additionally, the amount your limited company can contribute to your retirement savings won’t be tied to your net relevant earnings or salary. As an SME owner, your company can contribute more than what you’re personally allowed to, and save more for the future.
Do note that, unlike personal pensions, limited company pension contributions don’t enjoy similar tax breaks from the government.
The “Carry Forward” Rule
Everyone in the UK gets a certain annual allowance for the amount of contributions they can make with tax breaks. Previously £40,000, this allowance has been raised to £60,000 in April 2023.
Self-employed pensioners may use any unused allowance from the last three years of their contributions. That means if you didn’t use the annual cap for the previous years, you can apply to use it in the present.
So, for example, if you’ve only put in £30,000 last tax year, you may increase this year’s limit to £90,000. Those who haven’t invested anything into their pension for the previous two years can add up to £180,000.
As an SME owner, this can be beneficial to make up for a few “slow” years, allowing you to increase your retirement savings during financial upswings. It’s particularly valuable for people who have only recently started saving for a pension.
You can check out GOV.UK to check for any unused allowances.
Ways to Save For Your Retirement As a Small Business Owner
With pensions, the earlier you begin setting aside funds, the more benefits you can enjoy. If you’re now considering saving for your retirement other than your business, here are some of the ways you can start.
Personal Pension
A personal pension can be a flexible option for anyone trying to prepare for the future, whether you’re employed or running a small enterprise.
One advantage to these policies is that you won’t have to pay a fixed amount every month. Moreover, you can open a personal pension on top of your workplace pension, or any other type of policy.
Personal pensions offer a range of funds and investment options. Your provider will use the money you and other policyholders save to invest in strategically selected investments to generate profit, increasing your pension pot’s overall value.
Moreover, many personal pension schemes allow for transfers. That means, if needed, you can pool your retirement savings into one place. Check with your policy provider to verify if this is the case.
Self-Invested Personal Pensions (SIPPs)
While a type of personal pension, SIPPs provide extensive customisation, including flexible payment options and transparent investment pathways.
In a SIPP, the policyholders can decide whenever and how much to pay. You may also determine how your pension pot will be invested, and there’s an option to manage your funds personally.
You can easily expand your retirement portfolio, as SIPPs allow multiple policies to co-exist.
Because they’re classified as a personal pension, SIPPs are eligible for the 20% tax relief. But like a standard personal pension, the tax break will be limited to your earnings.
So, if your annual income is £30,000, you won’t be able to claim tax relief for contributions beyond that amount. Once your SIPP reaches maturity, you can either withdraw funds when you need them (called a “drawdown”) or purchase an annuity.
Small Self-Administered Schemes (SSAS)
A SSAS is a pension scheme for SMEs with no more than 11 members, usually for a limited company’s senior staff and directors.
Similar to SIPPs, SSASs provide greater and direct control over your funds and investment decisions. As the trustees in this scheme, you can opt to pool your members’ savings for better investment opportunities.
Final Thoughts
A State Pension is unlikely to make your later years comfortable, regardless of whether you managed to get the highest amount.
You could treat your business as your pension, but there’s a whole range of uncertainties that could derail your retirement plans. A personal pension, SIPPs, or SSAS may be worth investing in if you’re future-proofing.
