Don't trust to providence, provide for yourself
If you are a restaurant owner, fit and well with a bustling business, a pension may be the last thing on your mind. After all, your business is your pension, right? Well, maybe, but to ensure you can cash in on your business for a comfortable retirement you need to start assessing your options now.
Too many business owners are failing to apply the same vigour to their personal finances as they do to their business.
A recent study by accountancy firm Kingston Smith found that 54 per cent of entrepreneurs have no pension plans in place, while under half regularly review their finances. Many are seriously underestimating how much money they need to fund an early and comfortable retirement. The research found that 60 per cent of entrepreneurs would not get the comfortable £50,000 per year that they expect if they retired at 55.
So it's prudent to start planning your retirement as a matter of priority. Ask yourself at what age do you hope to retire?
What annual income will you need? How little could you manage on? Where will it come from? Can you get it from your restaurant?
Let's start with some simple arithmetic.
Suppose (Option A) that you want £20,000 a year, expect to live for 20 years after retiring, your capital will earn five per cent pa with no capital growth and you want to leave the whole of your capital for your family to inherit.
For this you will need £400,000. Suppose then (Option B) that you want the same income and interest but do not want to leave anything for your family to inherit. About £250,000 might just about do it. Option A is obvious: you have your own capital and live off the income from it. Option B works like a private annuity. You use the capital as you go and calculate the money to run out just when you die. If you die early there will be all that money you might have spent but didn't (good for your benefactors), and if you die late there will be nothing left to live on (very bleak for you). That is why you buy annuities with an insurance company, which takes the hit if you live longer than expected.
So how can you make your restaurant provide for your pension? The method that attracts many entrepreneurs is the straightforward sale of the business: a big lump sum coming at a time of your choice. But be wary of overvaluing it and underestimating your value to the business.
How integral is your experience and expertise to the standards of the business? How much of the restaurant's credibility and reputation rests on your shoulders and your name? Will you leave a gaping managerial hole when you retire? Will the chefs stay with the business without you? How much of your regular clientele can be relied upon to maintain their patronage without you? Don't kid yourself that a potential buyer won't accurately weigh up these factors before negotiating with you.
Another option is an unfunded pension plan. When you sell your business, you take a smaller lump sum and agree as a condition of sale that the new owner will pay you a pension. This also appears to be a painless option as there are no contributions for you to pay, but it's highly risky as there is no guarantee that the new owner will honour the contract to pay your pension, or remain in business to be able to do so.
A third option, which is the safest and can be the most interesting, is the registered pension scheme. Essentially, this involves using your business profits to invest in your pension while you run it. This should yield a large fund at the end to provide a tax free lump sum and a taxable pension in addition to what you can get from its sale. At best, you enjoy tax relief on the contributions, the income on the pension fund is tax free and the pension fund itself can borrow money and invest in your business, either directly or by purchasing the premises and leasing them to the business. This example can be particularly valuable after retirement, as the property, under the ownership of your pension fund, can continue to receive rent from the business after you have sold it. Executed correctly, you can have what in tax terms is your personal Cayman Isles, but all onshore and totally within our pension tax law system.
Who knows, you might even be able to afford a celebratory holiday there when your diligent pension planning pays off.
Roderick Ramage is a pensions consultant with Mace and Jones solicitors.
Planning for your pension
- Start thinking about retirement in good time. If you leave it too late you'll severely limit your options. Put aside more than you think you will need.
- Take sound financial and legal advice. For legal advice, ensure that pensions are part and parcel of your employment arrangements on the one hand, and your wills, trusts and tax planning on the other.
- Bury your head in the sand. It's your business, so make sure you get back what you put in for a comfortable retirement.
- Assume a thriving business equals a big pension pot when you want out.
- Use financial advisers who are more concerned about their commission than finding the product that's right for you.