Many people say that their business, or their property, is their pension. Here is some information comparing these approaches and some comments on the pros and cons of each.
MY BUSINESS IS MY PENSION
Business owners may see investing in their business as a very attractive option towards planning for their retirement. A point to note is that business finance may not be easily achieved and self investment may be the only viable approach.
The owners of a business usually have more confidence in their business than investors due to the certainty of knowing what is going on in their business. Investors may not have this information and more importantly may be sceptical when it comes to buying the business from the owners.
Taxation Advantages
• Corporation tax rates apply to profits of companies which are lower than the higher rate of income tax.
• Personal businesses usually attract IHT relief at a rate of 100%.
• Business-related capital gains may attract Entrepreneurs’ Relief at an effective rate of 10%, providing the lifetime limit of £10,000,000 (2019-20) is not exceeded.
Even with these tax benefits, funding retirement through the sale of a business is not as tax-efficient as a retirement plan. Where contributions are grossed up during the saving period and benefits are paid with a tax-free lump sum in the drawdown stage.
Disadvantages
• Lack of diversification
• Current earnings and future retirement income depend on the success of the business
• Retirement date may not be an ideal time to sell the business
• May not be able to sell and the individual may have to carry on working into later life
• Business may provide lower returns than could have been obtained from investing elsewhere
Using a property or property portfolio as a pension replacement
As well as building property portfolios to support retirement, 50% of people expect that they will be able to downsize at retirement to supplement their retirement income.
The main risks with this approach are:
• People tend to overvalue their own homes and it may not sell for as much as expected
• SDLT for the new home purchase will eat into any equity released
• Houses may prove difficult to sell
• Lack of investment diversification
• People may not want to sell when the time comes, or have no desire to move to another area.
Management of a property portfolio can also be time consuming. Once in retirement, the retiree may feel differently about dealing with tenants that don’t pay, maintenance issues and void periods. Of course, a letting agent can be appointed but this significantly eats into the rental income stream. If the property portfolio is mortgaged, this can not only stop the income stream but create a liability if the property is not let for any period of time.
So which approach is best?
More often than not the perfect solution is a combination of all three options. Building a Business and Property Portfolio will help supplement and even compliment a Pension income, so should always be considered a part of an overall strategy. Likewise a Pension scheme is a wonderful tax efficient asset but may prove difficult to save enough should you be rapidly approaching retirement.
If you are currently dependent on either your property or a business alone for your retirement plans, or if you just want a second opinion as t whether or not you have covered all the angles when it comes to your retirement please speak to a PS & Partners adviser today to make sure you are suitably diversified and protected against the risks of this or any strategy.