'My business is my pension'
I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.
Please drop me a line at email@example.com with your questions. You can also read more on money and consumer issues on my own blog.
Q. I am a shareholder in my own business and I have always regarded this as the main source of income in retirement. I have, therefore, never really bothered with any pension planning because I assumed that I would use the cash from my shares on the sale of my business as a pension. Recently, however, I have spoken to a few people who reckon that this is a slightly naive view to have, and that I should arrange some sort of pension as well. What do you think? Alan Macdonald
A. "My business is my pension" is one of these oft-quoted excuses among business owners and entrepreneurs for their lack of serious pension planning.
It may well be a valid excuse for many, on the basis that their reason for setting up a business is to have something to sell 10 or 20 years down the line.
But what if you can't find a buyer at the point you want to sell, or you don't realise the price you thought you would for your business?
Where will your retirement income come from then? Will you have to start the process again and set up another business? Or work for an extra five or 10 years until the business reaches the value you need for it to provide you with an adequate retirement income?
Or perhaps the real reason that you haven't thought about your own exit from the business is that you're too busy managing it day-to-day and making sure that you are going to have a business to exit from. It's a common problem, and it's not just retirement planning that suffers.
The 'business' you and the 'personal' you often become one and it can be difficult to separate the two. And therefore it becomes difficult to decide whose money you're talking about and looking after at any one time. "It's my company, so it's really my money anyway, is it not?" is a question often asked by company directors of their advisers.
And the answer is quite clearly, no it's not. It's the company's money. It only becomes your money when you remove it from the company either as salary or dividend or as a pension contribution, although then it becomes your pension's money rather than yours!
And the two of 'you' need to work hand-in-hand to make sure that your company objectives are not met at the expense of your personal objectives. You need to work with your advisors to ensure that you are extracting money from the company in a way that is tax-efficient for the business 'you' now, but that also protects your personal interests in the longer term.
You need to ensure that your company has measures in place to protect your family as well as your fellow directors in the event of something happening to you.
Where will your shares go in the event of your death? Do your fellow directors relish the thought of your spouse or partner turning up at the first board meeting after your death and sitting in your chair because they are now part-owners on the business in the absence of any measures to transfer your shares to your colleagues in exchange for their value at the time of your death?
And you need to make sure that the personal 'you' and your family are protected if you are unable to work for any reason. You don't want to burden the company with having to continue to pay you if you are off work sick long term, and a bit of forward planning can ensure that you and your key staff can make provision to have replacement incomes provided through insurance arrangements.
But planning all of these things take time. And that's the most precious commodity as you work round the clock to build and grow your business.
But it really is crucial that you take the time to look at what you are trying to achieve, and what measures you need to put in place to help you. These things don't just happen by themselves. It is your business; it should be your money. Make sure you take control of them both.