Horizon scanning is key for business owners to stay ahead (or even just up to date) of legislative change.
With anticipated modifications to owner-managed business structures and dividend taxation on the horizon, now is the perfect time for Isle of Man business owners to explore the many potential advantages of pension schemes.
These schemes not only provide a tax-efficient way to save for retirement but also offer significant financial and strategic benefits that can enhance both personal and business financial health.
Understanding the Changes
The 2024 Budget and subsequently published 2024-26 Tax Strategy referenced that changes lie ahead in how owner-managed businesses and dividends are taxed. Exactly what the changes will be is currently unknown.
However, the likely outcome is that it will be less attractive (potentially an additional tax burden of some sort) for business owners to take dividends, currently the most common method of taking an income for business owners.
As the Island aligns more closely with international tax standards, the need for financial planning strategies becomes more pressing. This is where pension schemes come into play, offering a reliable and advantageous alternative for securing your future.
Why Pensions?
Tax Efficiency
Pensions are one of the most tax-efficient ways to save for retirement. Employer contributions to an IOM approved pension scheme are a business expense and can therefore reduce the overall tax liability when extracting profits.
Additionally, investment growth within the pension scheme is typically tax-free, and upon reaching retirement age, a portion of the pension pot can be accessed tax-free. This is particularly advantageous in light of the recent income tax rate rise coupled with the freezing of personal allowances.
Wealth Accumulation
By contributing regularly to a pension scheme, business owners can steadily accumulate substantial retirement savings.
The power of compound interest, combined with the tax advantages of pensions, can significantly enhance the value of these savings over time.
Having a sufficiently large retirement fund not only provides for a more comfortable retirement but also offers increased financial security against unforeseen business downturns or economic shifts.
Flexibility and Control
Modern pensions (known locally as pension freedom schemes) offer considerable flexibility at retirement.
In addition, when building a retirement fund, business owners can access a range of investment solutions, tailoring their pension plans to match their risk tolerance and broader financial goals.
Protection from Creditors
An often-undervalued benefit is the fact that pension assets are typically protected from creditors, offering an additional layer of security.
In the unfortunate event of business insolvency or personal financial difficulties, the funds within a pension scheme remain safeguarded, ensuring that your retirement savings are intact.
Succession Planning
Business owners typically think of their business as their pension. This might work, if you can secure a buyer and agree an acceptable price to fund your retirement.
However, business owners often have a biased view of the value of their business and it’s vital to be realistic as to the value of it to someone else, especially if any key skills are lost via the exiting party. Is the realistic sales price enough?
What if selling isn’t really an option?
Take a family run business, using a pension to build a fund for retirement can avoid the need for a sale and instead create opportunity to pass the business on smoothly to the next generation, with minimal business disruption or personal tax implications.
What can you do?
Review your current strategy
Assess your current financial and retirement plans and consider the impact of any potential tax changes.
Could contributing to a pension schemes result in better tax efficiency for you now and financial security for the future.
Typically, this is getting the balance between paying yourself now, being able to pay yourself in the future (i.e. having an income in retirement in whatever form) and retaining sufficient cashflow for your business needs.
Your accountant, or the person in charge of the finance side of your business, is likely to be able to help determine this.
Consult a Financial Planner
Working with a regulated financial planner provides many advantages.
As Chartered Financial Planners, we have the skills and expertise to match your business and personal objectives up with the most suitable pension and investment strategy.
In addition, we believe that taking a holistic approach and building a life-long financial plan, can give you the best possible retirement and reduce financial anxiety.
Without a plan, how do you know what your retired years will likely cost? And, without knowing how much is ‘enough’, how do you know how much to save?
Now is the time to act, ensuring that you are well-prepared to navigate any future changes, whilst securing a prosperous future.
