For many self-employed people and business owners, pensions can easily fall down the priority list.
Running a business, finding clients, managing cash flow and keeping everything moving can leave little time to think about what happens years down the line. But according to independent financial adviser and wealth coach Rebecca Robertson, putting off the question of retirement planning could leave business owners relying on an asset that may not provide the security they expect.
In the latest edition of Ask Becky Anything on Accelerating Your Wealth, Robertson tackled questions about pensions, business exit strategies, property, stocks, and shares and how people can start investing without taking unnecessary risks.
Is your business really your pension?
One of the most common arguments Robertson hears from business owners is that they do not need a pension because their business will eventually fund their retirement.
But she says there are two important questions to ask: how much will the business be worth when you want to sell it, and will that amount be enough?
Not every business is built with an eventual sale in mind.
Many smaller businesses are one-person operations or employ only a handful of people. They may rent their office space and have relatively few physical assets. Instead, much of their value can sit in the owner’s expertise, relationships, reputation, and brand.
That can make putting a definite figure on the eventual sale value difficult.
Robertson points to professional firms such as financial advisers and accountants as examples where businesses can sometimes be easier to value because they have ongoing client relationships and recurring income.
For other businesses, however, profitability does not necessarily translate into a straightforward sale price.
Her own approach is to have both a business that could potentially be sold and a pension, rather than relying entirely on one source of retirement income.
Why having an exit strategy matters
A business exit strategy can be an important part of long-term financial planning, but it should not necessarily be the only part.
There are countless things that could affect the value of a business over time, including changes to regulation, market conditions, and the wider economy.
Even if an owner believes their company will be worth a substantial amount in the future, there is no guarantee that the circumstances will remain the same.
The situation can be different when a business has accumulated tangible assets such as property. Those assets can potentially be sold, but even then, there are uncertainties.
A property can take time to sell, particularly in a slower market or when dealing with larger or higher-value properties. The eventual sale price is also not guaranteed.
For Robertson, this reinforces the importance of diversification rather than putting all of a person’s future financial security into one asset.
Should business owners invest in property instead?
Property is another popular suggestion for people looking to build wealth outside a pension.
Robertson says property can form part of a wider investment strategy, but relying heavily on a small number of properties carries its own risks.
Someone with three rental properties, for example, could see a significant proportion of their income disappear if one property becomes vacant or stops generating an income.
There are also costs associated with property ownership, from repairs and maintenance to changes in leases and other unexpected expenses.
The key message is not that property should be avoided. Instead, it is that it should be considered alongside other assets rather than automatically being treated as a replacement for pension planning.
A pension can already invest in stocks and shares
Another piece of advice sometimes given to people is to forget about pensions and simply invest in stocks and shares.
Robertson says this misses a critical point.
A pension can itself be invested in stocks and shares. The difference is that the investment is held within a pension structure that comes with its own tax rules and benefits.
Investors can also choose different ways of accessing the markets, including funds, individual investments or professionally managed portfolios.
The important consideration is how the investments are structured and whether they are appropriately diversified.
For a business owner, taking qualifying profits from a limited company and contributing them to a pension can also have tax implications, although the rules and circumstances need to be considered carefully.
Why independent financial advice can make a difference
Robertson says the conflicting advice people receive about pensions, property and investing often comes from the fact that individuals have different financial circumstances and experiences.
What worked for one person does not necessarily make sense for another.
That is why she recommends considering independent financial advice when making significant financial decisions.
An adviser can look at someone’s wider circumstances, goals, attitude to risk and existing assets before recommending a strategy.
For people who are not ready to take advice, Robertson’s message is simple: start somewhere.
Even making a small pension contribution can be a first step towards building a long-term habit.
She suggests setting a date to review the arrangement later, rather than continually putting the decision off.
What about keeping savings in cash?
The second question came from Carrie, who currently keeps her savings in a high-street building society ISA paying 3% interest.
She wanted to know whether moving some of that money into shares could potentially make it work harder.
Robertson’s response was to distinguish between saving and investing.
Cash can provide security and accessibility, while investments offer the potential for greater long-term growth but come with the risk of losing money.
For someone who might need their savings in the near future, investing all their money in the stock market would not necessarily be appropriate.
The longer someone can leave money invested, the more opportunity there is for it to grow, although investment returns are never guaranteed and markets can fall as well as rise.
Do not invest money you may need soon
One of the biggest considerations when moving from saving to investing is whether the money is genuinely available for the long term.
Robertson suggests that someone should think carefully about whether they could leave the money invested for at least five years and whether they would be able to cope financially if the value temporarily fell.
That does not mean accepting a particular level of loss or assuming markets will always recover within a set timeframe. Instead, it highlights the importance of understanding investment risk before committing money.
For someone who has £20,000 in savings but may need it for an emergency, a car or because their employment is uncertain, investing the entire amount would leave them exposed.
Starting with a smaller amount can provide an opportunity to understand how investing works without putting all their savings at risk.
Investment charges can eat into returns
Charges are another factor investors need to understand.
Investment platforms can charge fees for holding and administering investments, while the funds themselves may have their own ongoing charges.
The exact cost varies depending on the provider, platform, and investment strategy.
Robertson says investors should look beyond the headline return and understand the overall cost of investing.
A small percentage charge can have a meaningful effect over many years, particularly when an investment portfolio becomes larger.
Start small rather than waiting for the perfect moment
For people who have always been nervous about investing, the idea of moving a large amount of money into the stock market can be daunting.
Robertson’s suggestion is not necessarily to go all in.
Starting with a smaller amount can allow someone to become familiar with how investments behave, how markets rise and fall and how comfortable they feel with investment risk.
Over time, that experience may give them the confidence to consider increasing their investments or seeking professional advice.
The same principle applies to pensions.
Rather than worrying about how much should have been invested years ago, the more useful question may be what action can be taken now.
The importance of having a diversified financial plan
The common theme running through both questions is diversification.
A business, property, pension, cash savings, and investments can all have a place in someone’s wider financial picture, but relying too heavily on one asset can create additional risk.
For business owners in particular, the temptation to view the company itself as the retirement plan can be strong.
But the value of a business is not guaranteed, just as property prices, investment returns and interest rates can change.
Building a range of assets can therefore provide greater flexibility when circumstances change.
Where should you start?
For anyone who has been putting off their pension or investment decisions, Robertson’s advice is to stop waiting for the perfect time.
That could mean opening a pension, reviewing existing savings, researching investment options, or speaking to a regulated financial adviser.
The critical point is to understand what you are investing in, what level of risk you are taking and whether you can afford to leave the money invested for the long term.
Financial decisions are personal, and there is no single strategy that works for every business owner, employee, or investor.
But taking the first step could be more useful than continuing to put the decision off.
Accelerating Your Wealth is hosted by Rebecca Robertson, independent financial adviser and wealth coach, and director of Evolution Financial Planning
Rebecca Robertson in the Accelerating Your Wealth podcast.
