When entrepreneurs are setting up a business, there’s so much to focus on that retiring seems a very distant horizon. But leaving it too late will cause problems in the long term. So, how do you decide what to do – and what are your choices?
Step 1: Looking after your employees
You are required to have workplace pensions in place – this is a legal requirement. In workplace pensions both the employer and the employee will contribute.
It’s your responsibility to ensure that the pension is set up and administered. You must contribute at least 3% and the employee 5%. You can contribute more; this is something to consider if it’s important to you to keep and motivate good people.
If you have employees who have been with you from the start, you could consider an employee ownership scheme. This is a way of ensuring business continuity, whilst retaining and rewarding good staff.
Exemptions and things to check
You need to create a pension scheme if you employ just one person, but this is not a requirement of a sole trader. If all employees are Directors, the requirement to offer pension schemes is also waived. If you have part-time members of staff earning under £10,000, there is no pensions requirement; but they can join a pension scheme voluntarily.
As a responsible business owner you will want to ensure that the pension fund you use is properly administered, so check the provider is regulated by the FCA. Employees will be auto-enrolled on to the pension, unless they opt out.
Step 2: Thinking long-term
Your focus at startup, quite correctly, is on getting the product or service right, marketing and selling it, then growing the company. However, there are several problems created by delaying thinking about your own pension. Investments you make later in life to redress the balance will not have the same growth and if you find it hard to work later in life for health reasons or otherwise, you have less to fall back on.
“When you start a business, there isn’t much spare cash,” says Ian Hunt, Managing Partner at East Devon Law. “You pour everything into the business to keep it going. The mindset of the entrepreneur is often that they don’t want to retire anyway – they think they will make a success of the business, eventually sell it on and perhaps retain some consultancy to keep day-to-day income flowing.”
Timings and other considerations
The key is to think about your pension at the right time. “Most new businesses are likely to take five to seven years to get established. And during this time, you have a lot of expenses – e.g., investing in technology and systems.” These two factors combined mean that early on, there is neither the finance nor the time to consider pensions properly. “But a few years in will be a good time to take stock and look forward. What future financial planning have I got? Do I have measures in place for business continuity? If I am a sole trader or in a partnership, have I arranged for power of attorney? Have I made a will? See all of these things as part of your pension planning.”
As an entrepreneur you are likely to find that you have good years and bad years financially. You may find that in a good year, you want to add lump sums to your pension to keep it healthy. And should you find a shortfall in your expectations, aim to make this up with one-off payments.
If you have come to running a business later in life, it’s possible that you’ll have different pension pots from your various previous employments. Can these be brought together to generate more earning power? Talk to a pensions adviser – “someone who understands your circumstances,” Ian Hunt urges. “And when you have found that good adviser, hold on to them. One other thing – check your state pension contributions are what they should be and if they are not, top them up. No one wants to be relying on this, but at the very least make sure it’s in good order.”
Step 3: know your personal pension options
The key for a startup founder’s pension is to think about what you expect to live on when you retire, the approximate age you want to be when your retire, and how long you reasonably expect to live. You don’t have to retire fully on a fixed date if you don’t want to, and you can choose how you want to take your pension.
Bear in mind that pensions savings are taxed at a preferential rate compared to most other types of saving.
You have different options including but not limited to:
- Personal pension plan
- Stakeholder pension scheme
- SIPP (Self-Invested Personal Pension Plan )
The different types of pension
Personal pension plans are products that can be bought from most banks. By making regular payments into a scheme that is then invested on your behalf, it gives a lump sum and steady income after retirement. You can access the pot from 55 but this is likely to increase to 57 in 2028. The eventual sum you receive depends on length of time and amount paid in.
Stakeholder pensions offer a little more flexibility and can be appealing for sole traders with incomes that go up and down. Whilst these tend to be offered by larger companies, it is possible to set one up yourself.
A SIPP offers the option to choose and manage your own investments. They can incur larger charges as a result of this flexibility. If you want to have control over where you invest and you’re happy making such financial decisions, SIPPs can be appealing.
At retirement, you then usually have three options:
- Access all of your pension pot via a lump sum payment. 25% of this will be tax-free, but you will pay tax on the rest. You need to have your own rest-of-life financial planning in place if you choose this option.
- Take out 25% of the pot tax-free, then use the rest to create an annuity – i.e, a regular taxable income, for life.
- Pension drawdown. Take 25% of the pot as a tax-free lump sum, then re-invest the remainder. You are able to set the amount, but this is not guaranteed for life as an annuity is.
- The particular choice you make will depend on your personal circumstances and on what you want to get from your pension. There’s no right or wrong answer. If you want to leave your pension pot untouched, you can do so and let it keep growing, with tax benefits until you are 75.
As the company owner, consider the fact that you are the figurehead. Can the business function without you if you have to retire suddenly due to ill health? Consider key person insurance as part of your pension planning. This would pay a sum of money to enable someone else to help with the running of the business.
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