Business Planning

How to Enhance Your Business Protection in 2020

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Business protection is all about preparing for the worst, so your business has the best chance of reaching its full potential. It can help you to keep trading and financially afloat should things go wrong, which, in light of the COVID-19 national lockdown, things broadly have. In April 2020, most businesses remain closed under Government guidelines, with airlines grounded and sectors such as hospitality and retail suffering heavy financial losses.

Of course, no business owner could have predicted the effect COVID-19 would have on the economy. Yet for some businesses that are continuing to keep going during the crisis and for those that will resume post lockdown, there are still things that can be done to enhance your business financial protection.

Here is our short guide for business owners.


Protection & business type

Financial protection can come in many forms depending on your business goals, strategy, size and stage in its life cycle. In February 2020, there were nearly 5.9m private businesses across the UK; the vast majority (99%) comprising small or medium-sized businesses (SMEs) with under 250 employees. When added together, these businesses form a huge part of the UK economy, employing 16.6 million people.

There are many factors which keep businesses afloat, such as product development and strong distribution networks. However, a crucial (and often neglected) factor is business protection infrastructure. In other words, what would happen to your business if either you, or another key person, could no longer work because they became seriously ill, or even died?

This has always been an important question for a business, but in light of COVID-19, it has become even more poignant. None of us knows what’s around the corner, even if we do not believe the worst could happen to us or someone we know. Unfortunately, we are able to recount cases from our own experience, where a company took out protective cover, and only a few years later a Key Person within the organisation (e.g. the Director) sadly passed away.

Unfortunately, financial protection cannot prevent tragedy but it can help soften the blow. We can help you identify the weak points in your protection plan and find the best solution for your situation.


Succession planning

Whilst all businesses are different, one common issue centres around succession planning; i.e. who will take over should the Director/owner die, or suddenly become incapacitated (e.g. through a serious accident). At FAS, we can work with your Accountant and Solicitor to help you craft both a short term and long term succession plan. The first plan is most important, as it assists in addressing the more pressing issues that could occur if the business leadership is severely disrupted. The second, however, involves developing a tax-efficient plan to eventually transfer leadership to new management, usually after the current Director/owner reaches their intended retirement date. This might take the form of handing the reins to a trained family member, appointing an external successor or even business disposal. Regardless of the situation, careful planning is needed to ensure livelihoods are protected and liabilities are addressed.


Key Person protection

In the case of a sole trader, one of the key protective measures you might want to consider is Life Insurance. After all, since your business largely rests on your own shoulders, if you die suddenly then it will be considered as part of your Estate for Inheritance Tax (IHT) purposes. A lump sum from a good Life Insurance policy can help ensure your beneficiaries have the liquidity they need to wind up your business or take up the reins whilst dealing with any debts in your name.

For joint partnerships and Limited Liability companies, however, things work differently due to the share structures involved. Suppose one business partner in a joint partnership dies; what happens to their shares? Typically, these will pass to their beneficiaries, usually a surviving spouse. Unless you (the surviving business partner) have the funds and written agreement in place to ensure you can buy these shares, your business will run the risk of being held back by a stakeholder who has no interest or experience in stepping in to take the deceased’s place.

Once again, this is where our experience in dealing with such matters can really help. We can help you come to a binding agreement with your business partner which addresses the above scenario, and releases the funds you need to buy the deceased’s share(s) or we can assist with the arranging of a Key Person protection policy to guard against the loss of a key person. The right type of cover can help release the funds you need to help meet commitments, without rocking the entire ship.

If you are interested in discussing any of these aspects in more detail, please do give us a call.

Financial Planning for Business Owners: A Short Guide

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Financial planning can be a challenge when simply dealing with your own personal wealth and finances. Trying to tie your pension, taxes, protection and estate planning into one coherent strategy, for instance, required considerable thought and ongoing review. For business owners, however, things can be even more complex; often blurring the lines between professional and personal financial planning.

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Simple Pension Tips For Self-Employed People

By | Business Planning

As Financial Planners servicing Kent & the South East, we have witnessed first-hand the steady rise in self-employed people looking for financial advice and tax planning. In fact, across the UK, the total number of self-employed has risen from 3 million to 5 million people since 2001. This is an exciting trend but it poses a lot of challenges when viewed through the lens of pensions.

Whilst employed people in the UK are now compelled to contribute towards a pension via Auto-Enrolment, no such obligation currently exists for self-employed people. The worrying result is that many of these people are failing to adequately prepare for their retirement, instead relying on the insufficient provisions of the State Pension.

Self-employed people face unique challenges when it comes to saving for a pension, as well as some great opportunities. On the one hand, irregular income can make saving for a pension quite difficult, and you have no employer contributions topping up your own contributions.

On the other hand, the fact that you are building a business gives access to a set of assets that could set you up for the future. Indeed, it is not out of the question that these assets, when handled correctly through careful financial planning, could pave the way for a comfortable early retirement.

Know the limits of the State Pension

Many of the self-employed people we speak to in and around Kent & the South East, have unrealistic expectations when it comes to the State Pension. Many people assume the Government will look after them in retirement but unfortunately the amount provided through the State Pension is simply not going to stretch far enough for many.  Indeed, with rising life expectancies and a growing elderly population, means that the State Pension system is likely to come under more strain in the years ahead

This makes it even more crucial for self-employed people to work with a Financial Planner to ensure they are saving adequately for their retirement. Presently in 2018-2019, the new State Pension will give you up to £164.34 per week. Even if you assume you will have paid off your mortgage by the time you retire and other expenses reduce, this is still far too low for most people to live on each month. Current figures estimate that about 45% of self-employed people, aged between 35 and 55, do not have a private pension to supplement their State Pension.

Know your tax reliefs

Self-employed people are at a disadvantage when it comes to pensions, in the sense that they have no employer to top up their contributions. However, they can still benefit from an important tax relief when making contributions. So, for every £100 you put into a pension the Government will effectively top it up by £25. This assumes you are a Basic Rate taxpayer. If you are in the Higher Rate bracket in England, Wales or North Ireland, then you can claim back an additional £25 for every £100 you put in.

Know about the different pension types

As a self-employed person, you do not benefit from a Workplace Pension Scheme but you do have a range of options when it comes to Personal pensions. By arranging your own Personal pension, you will have greater control over the choice of provider and where your funds are invested. It is important to be aware that there are different types of Personal pensions, such as Stakeholder Pensions and Self-Invested Personal Pensions (SIPPs). The former tend to have lower charges with limited investment choice, whilst for the latter have a wider range of investment funds to choose which costs more.

It is sensible to explore your options in detail before commencing contributions, especially if you are unsure which type of pension arrangement is most suitable for your needs. Our Financial Planners will be able to provide you with impartial advice and help you plan for a comfortable retirement.

Be aware of the limits

When you are self-employed you have the advantage of being able to decide your own contribution levels. However, just like everyone else, there is a limit to how much you can contribute and also receive in terms of tax relief. There are two limits in particular that you need to be aware of. Firstly, the ‘Annual allowance’ which limits the amount you can contribute to your pension arrangement in any one year. For the tax year 2018-2019, the maximum you can contribute to a pension and receive tax relief is £40,000. Any contributions above this amount cannot receive tax relief.

Secondly, the ‘Lifetime Allowance’ is the total amount you are allowed to save in pensions whilst receiving tax relief. In the 2018-2019 tax year, you can have up to £1,030,000 in your pension savings; any amount above this will not be able to receive tax relief. If you are fortunate enough to have more than this in pension savings, it is important to be aware of the implications. For instance, any amount over the Lifetime Allowance (LA) that you withdraw as a lump sum will be taxed at 55%. If you decide to draw funds over your LA as a regular income, this will be taxed at 25%.

If you think your pension savings might one day exceed the then current Lifetime Allowance, we would encourage you to speak to one of Financial Planners to talk through your options. With clever planning, it may be possible to avoid paying unnecessary tax on your pension savings and ultimately bequeath more to your beneficiaries.