By Steve Rees, Managing Director, Carpenter Rees, a UK financial consultancy for families and family businesses:
Planning ahead for retirement is an important – and often difficult – consideration for small business owners. Although a wide range of retirement options exist, their availability varies greatly based on the owner’s future plans for the business, how much time they have before they retire and what arrangements they have made for succession planning. It is important for SMEs to consider each of these factors individually with their advisors before deciding on a retirement strategy.
The first questions to ask when deciding on a course of action are: when do you plan to retire, how and how much money do you need? Currently, the UK pension age is 65 for men and 60 for women, however, many small business owners expect to work longer – either out of choice or because they do not feel they have adequate financial means for retirement.
In addition, the recent economic crisis has caused many individuals to push back their retirement plans to account for underperforming investments, or problems related to their company’s cashflow or debt burden. Although conditions for SMEs in the UK are improving, it is likely that the future plans of many small business owners will be severely affected for years to come.
Another important question for SME owners is whether they plan to sell the business to help fund their retirement, or maintain ownership, with the intention of eventually passing control over to another party. According to a recent study, 36 per cent of those UK SME owners surveyed said they planned to sell their business, while 25 per cent intended to pass their stake on to a family member.
For owners who are planning to sell, determining the type of lifestyle you expect to have after retirement should be an indicator of the level of growth your business needs to achieve. Not every business owner will be able to retire off the proceeds of the sale of their business – especially given the difficult economic climate. Diversification is important and individuals are advised to have a good spread in their investment portfolio and not put all their eggs in one basket.
For companies that are doing well, it is recommended that owners review their future business plans for at least the next five to 10 years to determine whether changes need to be made to make the company more attractive to buyers on the open market and potentially raise its value. Similarly, if you are considering the possibility of a management buyout, a strategy to strengthen the management team will need to be put in place to facilitate this option.
For family business owners, the lack of succession planning is a common pitfall that SMEs face when developing financial strategies for the future. Whether your business is a husband and wife partnership, or a company spanning generations, it is important to develop a considered plan of action in advance to ensure a smooth transition.
Transfers may involve family members or management insiders and typically aim to maintain continuity of leadership and protect the value of the company. A successful transition plan will outline both the transfer of control of the business to the designated successor, as well as the transfer of assets, which may involve several individuals.
This process will require the involvement and cooperation of the business owner’s legal and financial advisors, as a team approach is often best practice. This will ensure all tax and family protection issues are covered.
Although every solution will be tailored due to the unique characteristics of the business and the goals of the owners, there are a wide range of financial vehicles to help SMEs plan ahead for retirement. For example, self-administered pension schemes (SSAS) offer one of the best financial and investment paths for individuals who own a company. Simply put, they allow members to control how their pension fund is invested and can be used to invest in the business, are flexible ,can be utilised to buy commercial property for the business to occupy and assist in passing down assets to future generations in the business.
Given the potential impact of business-related issues on an individual’s retirement prospects, it is essential that SME owners consider their objectives in depth and make appropriate arrangements. With the support of financial and legal professionals, individuals can feel confident that they have a retirement strategy that helps them effectively meet their goals.