Building a business is undoubtedly one of the most rewarding ways to earn a living. You have the opportunity to create, build, and refine a product or service, all while being the biggest beneficiary of your hard work.

While some business owners plan to never retire from their companies, the ultimate goal for most entrepreneurs is to generate sufficient wealth to support their lifestyle, both now and in the future. Indeed, you very likely use the work your business does now to provide an income, part of which you might set aside for your retirement.

If you fall into this latter category, you might well see your business essentially as your pension. You may well think that you can use your business to provide an income through a salary in the short and medium term, and then sell your business and live on the proceeds in later life.

However, while this might sound like a perfectly viable strategy, this may not be the most sensible way to organise your wealth. In fact, it could even threaten your financial security in later life.

So, find out why your business is not your pension, the value of saving into a dedicated retirement fund, and how we can help you plan for the future at Cordiner Wealth.

Your business may be one of your most valuable assets – but that doesn’t mean you can rely on it for retirement

Naturally, your business is likely to be one of the most valuable assets you own. So, the idea of selling it – either to someone involved in the company already or to a third-party buyer – may seem like a simple, straightforward way to fund your retirement.

However, there are some key issues associated with this strategy. While not exhaustive, three that you may want to take into account are accessibility, value, and tax.

Accessibility

While your business might be your most valuable asset, you can’t access that wealth until you sell the business.

This assumes that you are able to both attract a willing buyer, and convince them to pay what you think the business is worth – or even just what you need to live your desired retirement lifestyle.

Value

With value in mind, it’s worth remembering that there’s no one true value to your business. There are metrics you can use to measure it, such as market capitalisation, or you could pay for an independent valuation. But otherwise, your business is only as valuable as the price someone is willing to pay for it.

This could make forward planning difficult, as you won’t know what you will receive from your business until you actually come to the sale.

You can certainly hold out for a specific value that you want to receive from a buyer. But if no one is willing to pay it, you might find yourself in a position where you’re forced to drop the price.

In the worst-case scenario, you may even have to wind up your business shortly before you retire, potentially leaving you with nothing.

Any one of these outcomes could limit your ability to live your dream lifestyle in retirement.

Tax

You may have to pay Capital Gains Tax (CGT) when you sell your business. Charged at 10% for basic-rate taxpayers and 20% for higher- and additional-rate taxpayers, this could put a significant dent in what you receive from your sale.

You do have an annual exemption for gains before tax is due, although this is just £3,000 in 2024/25 and so may not go very far in reducing a charge.

Otherwise, there are certain reliefs available, such as Business Asset Disposal Relief (BADR), that could reduce the CGT bill you face when transferring ownership of your company. This essentially means you pay the basic 10% rate, even if you are liable for the 20% rate.

However, this is only up to a lifetime limit of £1 million. So, even if you can make use of BADR, you’ll usually still face the higher rate on gains above this threshold.

Saving into a pension could be an effective way to extract money from your business

With these considerations in mind, you can see why solely relying on your business could be a relatively risky way to fund your retirement. This is why you may want to consider saving into a pension during your time running your company.

There are various advantages to pension saving, perhaps most significantly the tax efficiency that wealth in pensions benefits from.

You’ll typically receive tax relief at your marginal rate of Income Tax on pension contributions, provided they’re within your Annual Allowance. In 2024/25, this is up to the lower of £60,000 or 100% of your earnings. You may have a reduced Annual Allowance if your income exceeds certain thresholds, or you have already flexibly accessed your pension.

This tax relief means that a £100 pension contribution technically costs:

 

  • £80 for basic-rate taxpayers
  • £60 for higher-rate taxpayers
  • £55 for additional-rate taxpayers.

 

The basic rate is usually applied automatically, and you’ll typically need to claim the higher rates through a self-assessment tax return.

Your wealth will grow free from Income Tax and CGT while it is within your pension wrapper, too.

Additionally, as long as you make the contributions through your company, they’ll be considered an employer contribution. This brings about two more key tax benefits:

 

  1. Employer contributions are considered an “allowable expense” by HMRC, meaning you do not have to pay Corporation Tax on this wealth.
  2. You won’t have to pay Income Tax or National Insurance as you would on money you take as salary, or Dividend Tax as you would on company dividends.

 

So, not only could you build a pot for funding your lifestyle in retirement, but you could also tax-efficiently extract wealth from your company using a pension.

Furthermore, you can request regular statements from your pension provider so you know what your fund is worth. With this value in mind, you could be able to make more informed decisions about the type of lifestyle you’ll be able to afford.

There are also accessibility benefits, in that you can typically start accessing your pension from age 55 (rising to 57 in 2028). At this point, you can usually take the first 25% of your fund tax-free.

This liquidity could be hugely useful in achieving your early retirement goals, perhaps for funding a luxury purchase or a period of travelling.

We can help you manage your wealth as a business owner

Aiming to use your business to fund your retirement is by no means inherently bad. However, it could come with pitfalls such as those discussed above, making a pension a more attractive option.

In fact, if you pay into a pension as you build your company, you could combine both of these strategies so that you can achieve the retirement lifestyle you want.

The key is in the planning. You need to know how you intend to fund your retirement so you can effectively put your wealth to work where it’s most appropriate to do so.

As part of this, it’s important to be aware of how much you’re going to need to fund your retirement. This means working out your goals for the future and your ideal lifestyle, and how much these will cost. That way, you can plan to a number that’s personalised to you, rather than simply saving as much as you can into your pension or aiming to sell your business for the highest possible price.

This is where financial planning can add real value, helping you work out what you want to achieve with your money and then organising your wealth to make sure you get there.

Want to find out more about planning your wealth as a business owner? Get in touch with us at Cordiner Wealth today.

Email hello@cordinerwealth.co.uk or call 0113 262 1242 to speak to an experienced financial planner.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate tax planning.