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Retirement planning is a key consideration for any small-business owner. Often eclipsed by more immediate concerns such as profitability and cash flow, it is an essential element of any SME’s long-term strategy.

Although a wide range of retirement options exist, their availability varies greatly based on factors such as the owner’s future plans for the business, how much time they have before they retire and what arrangements have been made for succession planning. Advisers must help SME owners to consider each of these factors individually before deciding on a retirement strategy.

Before any plan can be put into place, advisers should identify when their clients expect to retire and establish how much money they will need. The current UK pension age – 65 for men and 60 for women – is changing, so many individuals, especially those in their 40s and 50s, need to plan either to replace the later state pension with other funds, or for a later retirement than initially expected.

In addition, many small-business owners expect to work longer, either out of choice or because they do not feel they have adequate financial means for retirement. The economic crisis has caused many individuals to push back their retirement plans to account for underperforming investments, or problems related to their company’s cash flow or debt burden.

A recent survey of SME owners in the UK found that half had altered their retirement plans in response to the negative economic climate, with 42 per cent expecting to spend more time managing their business and nearly a third expressing concerns about their current pension arrangements. Although there are indications that the UK economy is growing and that conditions for SMEs are improving, it is likely that the future plans of many small-business owners will be severely affected for years to come.

Another important question for SME owners is whether they plan to sell the business to help fund their retirement, or maintain ownership, with the intention of eventually passing control over to another party.

Lifestyle expectations

For owners who are planning to sell, determining the type of lifestyle clients expect to have after retirement should be an indicator of the level of growth their business needs to achieve. Not every owner will be able to retire off the proceeds of their business sale, especially given the difficult economic climate. Diversification is important and individuals are advised to have a good spread in their investment portfolio and not put all their eggs in one basket.

For companies that are doing well, it is recommended that owners review their future business plans for at least the next five to ten years to determine whether changes need to be made to make the company more attractive to buyers on the open market and potentially raise its value. Similarly, if clients are considering the possibility of a management buyout, a strategy to strengthen the management team will need to be put in place to facilitate this option.

For family-business owners, the lack of succession planning is a common pitfall that SMEs face when developing financial strategies. Whether your client’s business is a husband-and-wife partnership, or a company spanning generations, it is important to help them develop a considered plan of action in advance to ensure a smooth transition.

Transfers may involve family members or management insiders and typically aim to maintain continuity of leadership and protect the value of the company. A successful transition plan will outline both the transfer of business control to the designated successor, as well as the transfer of assets, which may involve several individuals. This process will involve the owner’s legal and financial advisers, as a team approach is often best practice.

Tailor made

Although every solution will be tailored because of the unique characteristics of the business there are a wide range of financial vehicles to help SMEs plan ahead for retirement. For example, self-administered pension schemes (SSAS) offer one of the best financial and investment paths for individuals who own a company. (See below.)

Using an SSAS to fund business growth A structured retirement plan can often help support the business strategy of an SME or family-owned business. For example, an unquoted limited company was looking to purchase a commercial property to accommodate a care home business that it wished to set up, adding to the existing portfolio of nursing homes that it currently owned and operated. Two shareholding directors, a husband and wife who were both approaching 65, ran the company with their two sons, who were also directors but held no shares. The couple wanted to continue running and growing their business in the short term but ultimately pass management on to their children. They planned to purchase the property at auction for £750,000 and upgrade the 45-bed facility to increase the total bed capacity and install private bathrooms in each room – at an additional cost of £800,000. Given that the business was already highly leveraged, the company’s bank was unwilling to provide sufficient capital to allow for both the purchase and renovation of the desired care home. By working with legal advisers and financial planning specialists to review their accounts and pension arrangements, the business owners could use their retirement strategy to help them expand their business and facilitate buying the property. First, the company and their advisers met the bank, which agreed that there was some scope to rewrite the existing debt and release a further £300,000 to the business. Then extra capital provided by the restructured business debt was paid into a SSAS as a contribution. Finally, the business owners established a succession plan and added their sons to the SSAS with a £50,000 contribution each, with the balance contributed on behalf of the parents. These arrangements not only helped the company achieve its short-term goals, they strengthened it in the long term by helping the family develop an effective strategy for the future transition of assets.

An SSAS is set up by an employer, usually intended for business owners, company directors and other key personnel. However, family members and other individuals – up to a maximum of 12 in total – may participate in the scheme. These flexible financial vehicles offer clients more control over how their pension fund is invested and can be used to fund business growth, reduce bank debt and assist in passing down assets to future generations.

There’s been an increased demand for lending among SMEs, according to the latest Credit Conditions Survey from the Bank of England. Occupational pension schemes, such as an SSAS, can be used by owners to fund business loans for themselves or purchase commercial property for the company to occupy, which can then be leased back to the business.

Perceived as a better way to borrow, this strategy allows clients to earn loan interest that would otherwise be paid to banks and generate the investment capital necessary to fund business improvements. Additionally, any rent on the commercial property can be paid into the client’s SSAS tax free; if sold, the client will not be subject to capital gains tax.

Although the ability to self-finance makes occupational pension schemes an attractive option for some SMEs, it is important that clients are aware of the limits and restrictions of this financial planning tool. The option is only available to individuals who have accumulated enough of a pension pot to back the business loan. Also, the maximum term for a pension-funded loan is five years and cannot exceed 50 per cent of the pension fund’s net asset value. While this solution may be a good fit for some companies, it will not complement every business owner’s long-term strategy and should be discussed thoroughly with clients prior to implementing.

Given the potential impact of business-related issues on an individual’s retirement prospects, it is essential that advisers help SME owners consider their objectives in depth and make appropriate arrangements. With the support of financial and legal professionals, individuals can feel confident that they have a retirement strategy that helps them effectively meet their goals.

Mike Carpenter is managing director of financial consultancy Carpenter Rees