"My business is my pension"
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of Insight Private Clients outlines significant tax-friendly open to business owners in Ireland
As financial advisors to business owners, we often hear the phrase "my business is my pension".
While there is an element of truth in this statement, it's essential to understand that pension planning shouldn't be limited to a single strategy. Rather, it involves making informed decisions across multiple strategies to secure a financially independent retirement.
The goal is to ensure that, when business owners eventually decide to retire, their “Golden Years” are truly golden — without having to worry about financial instability.
The key question for a business owner is this: should they invest solely in growing their business, with the hope of realising its value in the future, or should they contribute to a pension fund to ensure long-term financial security?
Let’s explore the pros and cons of the “my business is my pension” mindset.
No one understands the financial potential of a business better than its owner. If the business grows successfully and can be sold for a significant sum, it may indeed provide the owner with a substantial retirement fund.
As an entrepreneur, you have full control over how your business is run, invested in, and grown. You can make strategic decisions that maximise its future value.
A well-timed business sale can be highly lucrative. It allows for flexibility in planning retirement, offering the option for a partial exit or a gradual stepping back.
In many countries, including Ireland, current tax laws are favourable for business owners who sell their companies. Entrepreneurial relief & Retirement Relief also offers tax advantages for those selling.
For many entrepreneurs, their business represents years of hard work and dedication. Knowing that their retirement is funded by the value they’ve built can provide a deep sense of satisfaction and accomplishment.
Relying solely on your business as your retirement plan comes with significant risks. Making decisions without considering these risks can lead to financial instability during retirement.
Markets, technology, and economic conditions are constantly changing. A business that is valuable today may be worth much less in the future this unpredictability can greatly affect your retirement plan.
The assumption behind "my business is my pension" is that you will remain healthy and capable of running the business until retirement. But what if your health takes an unexpected turn? Relying solely on your ability to run a business increases the risk unnecessarily.
Putting all your eggs in one basket is never a good idea. Depending solely on your business for retirement income is risky, if your business suffers, so does your retirement plan.
By focusing solely on your business, you may miss out on significant tax benefits offered by pension contributions. In Ireland, business owners can accumulate up to €2 million into a pension fund, with this threshold expected to rise to €2.8 million by 2029. This allows you to move substantial amounts of money into a personal retirement account, tax-free.
Many business owners are deeply emotionally invested in their companies, making it difficult to sell or liquidate them when the time comes. This is especially true for family businesses, where succession planning may be a priority over maximizing financial value.
Given these pros and cons, what’s the best course of action for a business owner approaching retirement?
The key is balance — taking advantage of every available strategy, including building a pension fund. Here are some reasons why a pension should play a critical role in that strategy:
A business owner can contribute up to €2 million into a pension fund, treated as a tax-deductible business expense. This offers an efficient way to move money from the business into the owner’s personal wealth, free from Benefit-in-Kind (BIK) on company contributions.
Up to 25% of the pension fund can be withdrawn as a lump sum on retirement, with the first €200,000 being tax-free and the remainder taxed at 20%.
A pension provides diversification, reducing reliance on the business alone for retirement income. This diversification helps mitigate market risk, liquidity risk, and concentration risk.
A pension fund offers flexibility in investment choices, including traditional pension funds or a Self-Directed PRSA, which allows for direct investments in property.
Pension drawdowns can be staggered, providing flexibility to manage tax efficiently.
Under the right structure, your pension does not die with you. It can be passed on to your estate in a tax-efficient manner, providing a valuable liquid asset for your heirs.
It’s possible to "retire" your pension without fully retiring from the business. Subject to certain rules.
A well-funded pension gives you financial independence, allowing you to pass on the business to a family member or management team without the need to liquidate it.
In summary, we are seeing a large uplift in entrepreneurs appetite for pension planning.
They are not relying solely on their pension in retirement but likewise, they are not solely relying on their business for retirement either.
A pension is a hugely important facet of any retirement plan and merits more than consideration. It merits action.
Ultimately, relying solely on your business as your retirement plan is a high-risk strategy.
The unpredictability of market conditions, health issues, and other risks make it essential to consider all available options.
A balanced approach, combining the potential value of your business with a solid pension fund, can help mitigate those risks and provide you with a more secure retirement plan.