As anyone who runs a business will appreciate, time is a precious commodity. Making strategic decisions, effectively managing staff, and building relationships with customers and suppliers mean that business owners rarely have time to consider the important role financial planning can play in both the success of the business and the long-term financial security of key individuals.
Failing to consider financial planning can not only have financial implications but could jeopardise the long-term resilience of the business. Making the appropriate decisions can meaningfully improve the health of your business and protect the people within it. We look at three key financial planning considerations for business owners.
Protecting your interests
In our experience, many business owners, shareholders, and key personnel are running significant risks by not holding adequate protection should the worst happen. The death or serious illness of a business owner or key individual could have devastating consequences for the future success of the business and its employees; however, this potential risk is all too often overlooked.
A situation we commonly come across is where a shareholder in a small business leaves their shares to a spouse on death; however, the spouse may have no interest in becoming a shareholder and would prefer to sell those shares to the remaining shareholders. This creates an immediate problem as the surviving shareholders must raise the finance to purchase the shares, which can be prohibitive. By arranging shareholder protection in an appropriate manner, life assurance can be structured in a tax-efficient way to provide the necessary funds for the surviving shareholders to buy the shares directly from the spouse, ensuring continuity for the business and a fair outcome for the family.
Another common risk that is often ignored is the potential impact of the death or serious illness of a director, owner, or key member of staff, whose expertise, relationships, or skills are central to the business’s day-to-day operation. Without appropriate cover, the business could face significant damage to its profitability at an already difficult time. Key person insurance can cover this eventuality by paying proceeds to the business should a key employee fall seriously ill or die. The claim proceeds can be used to help cover recruitment costs, lost revenue, and the operational disruption that inevitably follows.
Benefits to retain key staff
A crucial component of any successful business is the ability to recruit and retain key staff. Salary alone is rarely enough to attract the most suitable candidates, and a well-structured benefits programme can be the deciding factor in recruiting and keeping the people your business depends on.
Death in Service, essentially a group life policy, is a cost-effective way of providing meaningful life assurance cover for employees. It is valued highly by staff, and their families, yet remains relatively straightforward and affordable to arrange. Similarly, a Group Private Medical Insurance policy is an attractive benefit that serves both the employee and the employer, as employees gain faster access to diagnosis and treatment, while the business benefits from reduced absence and a quicker return to full productivity.
Another cost-effective, yet valuable benefit is to provide enhanced pension arrangements for key personnel. Many firms use a Master Trust arrangement such as NEST or People’s Pension to meet their auto-enrolment obligations, and whilst these schemes may be cheap to operate from the perspective of the company, they offer employees limited investment choice and can carry higher charges. By providing key staff with bespoke pension advice and setting up a Group Personal Pension or individual arrangements, employers can offer greater flexibility, more competitive terms, and can demonstrate that they value their people’s long-term financial wellbeing.
Business owners’ retirement plans
Business owners are often so focused on the success of their business that they can neglect their personal finances, and in particular, their exit strategy and retirement plans. Business owners can save for retirement in a tax-efficient manner by making regular pension contributions. Depending on how the business owners are remunerated will determine the most tax-efficient way that pension contributions are made. For limited company directors, employer pension contributions can be paid directly from the business and treated as an allowable business expense, reducing the corporation tax liability in the process. This route is particularly tax efficient.
Pension planning can be a particularly useful tool as business owners near retirement, providing a tax-efficient method of extracting retained profits from the business rather than taking a large taxable dividend or salary. With careful planning, it is possible to make significant contributions to boost a substantial retirement fund while simultaneously reducing the company’s tax burden.
How we can help busy business owners
In our experience, business owners generally appreciate the benefits that independent financial planning can bring but rarely have the luxury of time to explore these options in sufficient depth. Managing the day-to-day demands of running a business leaves little time to consider the bespoke financial planning advice that can provide peace of mind for business owners.
As a Chartered, independent practice, we provide a comprehensive service that considers a company’s protection needs, the implementation of employee benefits packages, and a thorough review of business owners’ personal finances. Rather than requiring business owners to manage each of these elements separately, dealing with multiple advisers and providers, we can cover all areas, accessing the most appropriate products and solutions from across the marketplace.
If you are interested in speaking with one of our experienced financial planners to review your business needs, please get in touch. We would welcome the opportunity to show you what a difference well-structured financial planning can make.
