𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

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A successful small business that can stand the test of time is one of the best ways to achieve financial security, or even wealth.

While it’s true most businesses that are started do fail, the ones that can establish a profitable model, sustainable over the long run, can provide their owners with both money and purpose.

The time always comes though, sooner or later, when even successful small business owners have to call it a day and retire.

Whether through a desire to spend time on other things or due to age, every small business owner needs to be able to fund that portion of their life – which means they’ll need some form of pension.

Many business owners put all their money into their firm, with a view to firstly keeping it growing and ultimately selling it to fund their retirement. This certainly can work out well, but there are good reasons not to put all your eggs in this particular basket.

The risks of having no pension

If a small business is consistently a money spinner, there is every reason to believe you will be able to sell it to somebody in future and live comfortably from the cash you get, plus – hopefully – the state pension.

This does depend heavily on the exact nature and scale of the business though. In cases where you and your skillset is the core of the business, there may not be much to sell on when you stop working.

There may well be a list of regular clients, but whether they will be happy to be passed on to a new owner is highly uncertain. If the new owner does not have a similar set of skills and experience, or future demand otherwise collapses, then it could be a non-starter.

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If you have fully owned premises, tools, or machinery, these things all have value and can be sold on as a whole or in separate parts. The future value of such things is usually very uncertain though, adding uncertainty to future sale income.

The other aspect is the size of the business. If at the smaller end of the scale, the amount somebody is prepared to pay you to take over the business may not be enough to sustain an extended retirement.

It can be very easy to underestimate how much money you will need to fund retirement. First you do not know how long you will live, and second you do not know what the rate of inflation over the coming years will be.

How to set up a pension as a small business owner

One answer to countering these risks is to have something called a self-invested personal pension (SIPP), and in many cases buying an annuity when the right time comes.

A SIPP is a widely available retirement product. To get one you simply open an account with a well-established FCA regulated investment platform and follow the steps their websites will all take you through.

It enables you to save money for retirement on a tax-free basis. You can put money in any time you like.

Making regular monthly contributions is a good option for most, but you can do it once or twice a year if you like. The only restriction is the total amount per year must not exceed £60,000. You also get income tax relief on the contributions.

Once the cash is in the SIPP, you can invest it in stocks, bonds, ETFs and funds to grow it over time. All the gains will be tax free. Tax only comes into the picture at the point you start to take money back out.

That can be any time from age 55 up. At that time, you can withdraw 25 per cent of the money tax-free, up to £268,000.

You also have the option of buying an annuity, which might be a wise move for some people. An annuity guarantees you an income for life. Broadly speaking, the more you pay a provider for an annuity the higher that guaranteed income will be. There are also annuities which rise in line with inflation.

Either way, these are all options to consider to ensure you can fund your future – meaning you can focus your energies now on the business without worrying as much about when it comes time for retirement.