As you may be aware, at Carpenter Rees we have many years’ experience in setting up and administering Small Self-Administered Pension Schemes (SSAS) for our own clients. Whilst we are financial planners first and foremost, SSAS do form an important part of many of our client’s financial plans. Set out below is a typical case study demonstrating how the use of SSAS can assist our clients in their financial plan.
Husband and wife team, Roy and Janet have a business which makes and sells garden furniture. The business has been doing so well in recent years that their sons Alan and John have joined the business.
Roy and Janet have indicated that they intend to hand the business over to their sons in stages, as they would gradually like to take more time out of the business to enjoy travelling together and would like to replace some of their earned income with pension income.
The business operates from a rented warehouse and the landlord has recently offered
For many entrepreneurs, making a profit is an achievement and growing that profit year on year is the ultimate goal. However, this leads to the new set of considerations and planning needs.
Questions such as;
What do we do with excess capital?
How do I extract money from the business tax efficiently
How do I retain my quality staff and continue to attract more?
Carpenter Rees have always practised the principles of de-risking business owner’s personal finances. Having separate assets that are not linked to the business can give peace of mind and the ability to direct all their energies into growing the business. Taking money out of the business in a tax efficient manner, and using this capital to strategically build a portfolio of Investments independent from the business can help to achieve this goal.
At the growth stage of the company’s development, it is important that the company has a proactive accountant who will provide advice on profit extraction strategies. This includes maximising the tax benefits available by mixing remuneration by way of salary and dividends, the availability and scope of the level of pension contributions that can be paid and the private benefits that can be paid by the company (although some of these may incur a tax charge).
Pension schemes which were set up when the company first started making profits can now be funded to a greater
We have a great deal of experience in dealing with family businesses a lot of which comes because we administer the ultimate family business pension vehicle, the Small Self- Administered Pension Scheme (SSAS).
These schemes are the made to measure Family Business Pension! The family are trustees as well as members and have the facility to use the funds in the scheme to invest into the family business by way of a loan to the company (now referred to as Pension Led Funding but we still call it ‘Loan back’) or using the funds to purchase commercial property for the business. The key here is that the family has control over the investment strategy, the membership (family members only) and the level of contributions (within limits set out by HMRC).
We have been involved in a couple of recent interesting cases involving the use of the Family Business Pension:
The first was for a family business looking to reduce their debt to the bank but at the same time secure the assets owned by the family business for the current and future generations. The solution was for the company to sell its main site to the Family Business Pension, whose members are the generation currently running the business; the proceeds received by the company were then used to reduce the bank borrowing. The asset remains in the control of the family as trustees of the scheme and the company has achieved its goal at the same time.
The second involved the pension fund helping the family business buy a competing business out of Administration. A collection of 4 Family Business Pensions, from within the group of companies acquiring the business, purchased the business property as part of this transaction – thereby improving the scale of the business group and preserving over 100 jobs.
In our dealing with Family Business Pension Schemes we often get involved in interesting projects such as those outlined above. It is not always about the money it is often about where to have the assets (i.e. in the Company or the Pension) or sometimes it is simply about where there is access to funds and all too often in the latter case, the Pension can be the ideal solution.
I am probably preaching to the converted in many cases but please feel free to pass the word on to other family businesses that could benefit from a bespoke, made to measure pension scheme or who simply have a scheme, but are not receiving any proactive advice on what they can do.
The traditional view of work is that it’s something we wouldn’t otherwise do, without the financial reward of getting paid… such that the whole point of work in the modern era is to earn and save enough to get to the point where you can “retire” and not need to work anymore.
Yet research on what motivates us reveals that “money” is a remarkably inferior motivator compared to the motivation we derive from interpersonal relationships with other people. Yet due to our inability to judge our own motivations, and what will make us happy in the future, we continue to pursue financial rewards… even as a growing base of research reveals that it doesn’t improve our long-run happiness.
The reason why all this matters is that it implies the whole concept of “retirement” may be based upon a mistaken understanding of our own motivator, a realisation that most people don’t have, until they actually retire, (or at least, are on the cusp of it) suddenly discover that “not working” isn’t nearly as enjoyable as expected, despite all the sacrifices of potentially undesirable work that was done to earn the money to retire along the way.
So what alternatives have we seen from our business owners and professional clients? Many have come to recognise that work, at least some work, can be motivating and socially rewarding, where money doesn’t have to be the driving factor. Yet at the same time, often such work does at least have some financial rewards… which is important, because if “retirement” is simply about shifting the rewards of work from “mostly financial” to “only partially financial”, then the reality is that most people may not need nearly as much to “retire” in the first place.
This is important because if it is likely there is going to be at least some modest financial reward coming from mostly non-monetary work, it means many prospective “retirees” could make this switch even sooner. Assuming the retiree withdraws 4% per annum from the accumulated savings, then earning an extra £10,000 a year in part-time work in retirement reduces the target retirement savings needed by as much as £250,000! Carpenter Rees therefore do not talk about retirement, but about reaching the point of sufficient financial independence where “work” can be chosen based primarily for its non-monetary rewards.
We have seen many of our clients retire in the traditional sense but those that continue to work because they like the work they do or they can concentrate on the areas of work that they most enjoy or involve themselves in other projects can often have the more enjoyable financially independent lives.
I read recently about some of the more pertinent family business succession planning principles worthy of consideration. Having first-hand experience of dealing with family businesses, we have witnessed some of these principles in action together with the problems that can occur if these are not followed.
Beware of the tax driven/cost saving succession plan: Research indicates that often, far too much attention is given to technical components such as tax, trusts, insurance and shareholders agreements, whilst insufficient time is given to softer touchy feely issues like wishes and aspirations of the family members, integrating and preparing the next generation and family harmony.
Creating a legacy: Most successful family businesses adopt this concept. The founders of the family business have created a family asset that the family would like to continue to cultivate to establish a lasting legacy for the founders. Applying this principle means that the family wants the business to remain in the family with all future generations acting as ‘stewards’ to safeguard the family business, grow it and make it better for future generations.
Opportunity versus entitlements: Successful family businesses ensure that future
The Investment and Financial Services industry is noisy and is especially so in the middle of an election. Every day, thousands of articles, blogs, broadcasts, podcasts and webcasts are published, shouting for your attention and trying to make investment sexy.
It’s easy to fall into the trap of thinking that if you do not listen to the noise carefully and sift out the best ideas, i.e. the one’s that could help you find the highest returns—then you will not achieve your financial goals. Actually, we find the opposite to be true; trying to keep up with the latest investment fads can be detrimental to your long-term performance rather than beneficial to it. The noise can drown out the signal.
So what is the alternative?
We believe that it starts with having a strong evidence based investment philosophy that, over a long period of time, will prove to be rewarding for our clients. Our philosophy is based around some of the most enduring ideas in finance, these are ideas that help us achieve your financial goals by harnessing the power of capital markets in a systematic way. At the core, these fundamental concepts have remained the same for decades, but as research evolves into how markets work, our understanding improves and we develop our approach accordingly.
Added to this, we use investment managers that really take care over the details of implementation of the ideas. They understand that investment returns are precious and easy to lose in day-to-day management. They know it does not make sense to pay 5% in fees and costs to go after a 4% return.
This combination of a robust, enduring philosophy and a steady, disciplined application has helped us provide our clients with a way to turn down the noise.
Further to my blog at the end of March “You can’t Take it with you”, I wanted to share with you some experiences and observations around gifting to children.
In many cases people delay making decisions about gifting to their children and other family members which is often due to fears such as: –
They may squander the gift – This may indeed be the case, but if they are set to inherit the money eventually, gifting it to them whilst you are still around allows you to guide them. However, if this is a concern then the money can be gifted into a Trust. This would entail additional cost, added complexity and possibly a feeling of distrust and therefore if you are considering this option, you should be open with the family; at least about why. Another option is to gift an asset such as a property or a house deposit, which is difficult to squander and from our experience, property ownership makes children more responsible. Another somewhat extreme but effective measure is to make it known that if the gift is used unwisely, they may be disinherited.
Too much too young– I love getting song titles from the Specials into my blogs! Some people are concerned that giving money too soon could remove that individuals work ethic and desire to create their own wealth. This can be tricky and the choice will be determined by the child’s personality and the values they have had instilled upon them. Again, a trust may be a possible solution.
Future Outlaws – As we all know; divorce courts start from a 50/50 split of assets. If you are concerned
Family businesses in the UK employ over 9.5 million people and two thirds of this country’s businesses are family owned. We have a great deal of experience in dealing with family businesses, a lot of which comes as a result of the fact that we administer the ultimate family business pension vehicle, the Small Self- Administered Pension Scheme (SSAS).
These schemes are the made to measure family business pension plan – the family are trustees, members and also have the facility to use the scheme’s funds to invest into the family business by way of a loan to the company (now referred to as pension led funding, but we still call it loan back) or by using the funds to purchase commercial property for the business.
The key here is that the family has control over the investment strategy, the membership (family members only) and the level of contributions (within limits set out by our good friends at HMRC).
In addition to this, the fund can assist with the family’s succession plans in that Mum and Dad can draw their benefits from the pension fund making them less reliant on drawing funds from the business. This enables more to be paid to younger family members working in the business, when they probably need it most.
In our dealing with the family pension schemes, we have grown into the role of family business advisors and developed the soft skills necessary to help families with their future planning. It is not always about the money, but often about how and who is best to take the business forwards and where to have the assets i.e. in the company or the pension fund to help with the future generational planning.
I am probably teaching to the converted in many cases, but please feel free to pass the word on to other family businesses that could benefit from a bespoke made to measure pension scheme or simply have a scheme but are not receiving any proactive advice on what they can do.
At Carpenter Rees a great deal of our time is spent working with family businesses and therefore during 2016, to mark our commitment to the sector, we embarked on a research project with Manchester Metropolitan University’s Centre for Enterprise.
The initiative allowed us to gain a true insight into the aspirations of family businesses and will be instrumental in our work to help our clients reach financial freedom and achieve succession.
We are delighted that the research paper is now available to download from our home page. The research includes findings from a workshop held with some of our family business clients, as well as advisors that we often work alongside such as accountants, lawyers, finance and banking specialists, PR and marketing consultants and a management trainer.
We will continue to provide additional information in the area of family business over the coming months but in the meantime please do download the research paper, and of course, please share this with anybody who you feel would be interested.