As entrepreneurs, it’s important not just to plan for the growth of your business, but also to plan your exit strategy. Every business owner should be building towards this goal with all their investments, including pensions and looking at how they will generate income when they are no longer as closely involved in their current enterprise.
These new changes in pension law provide an unprecedented opportunity for others to look at their own business goals and exit strategy and take control of their own financial futures.
Up to now what you could do with your pension pot as you reached retirement was pretty limited. You could take 25 per cent as a tax free lump sum, but most people were then tied into an annuity, which means you give your capital to an insurance company who will then give you back a small percentage every year and as interest rates have dropped, so have annuity rates.
Say for example that I were to retire now and give £100,000 to an insurance company, I could expect at best to get about £4,900 a year with an annuity. However you look at annuities, they’re designed to tie you in. The rules were there because the Government didn’t want the irresponsible so-and-sos of this world spending all their cash in their 60s and coming to the state for help in their 80s when it was all gone.
But that’s all about to change. From April 2015, someone aged 55 and over will be able to access their pension pot with complete freedom. No one with a pension will be forced to buy an annuity and you can choose how much to take out each year. So we are being trusted with our own money and it’s our responsibility to make the most of it.
For business owners, who naturally want better returns and more control of their finances, there’s a significant opportunity to embrace the changes and make the most of these new pension freedoms.
One of my greatest inspirations has been Warren Buffett. He advocates investing your money into something tangible, that you fully understand and are therefore able to manage effectively.
But there’s another feature of the new pension rules which particularly appeals to us – the power of compound growth. As Warren Buffett might tell you, wealth is not made by assets that pay out high income (and so attract high taxes), but by assets where the income is automatically reinvested in the asset itself, capitalising on compound growth in a low tax environment.
Like many business owners I have a SIPP (Self invested Personal Pension), so the part of the new rules which particularly stands out, is not the ‘cash it and spend it’ opportunity, but the ‘keep it there’ scenario. Under the new rules, I can leave my investments in the SIPP to compound in a no tax environment. This means that I can decide which assets to realise and when – and my investments will continue to grow tax free in the meantime.
Now business owners can genuinely take control of their own financial futures and these reforms have given us just the right tools for the job.
Huw Evans is director of Evanridge Properties LLP and a former tax accountant.