As a business owner, whether in a small, medium or large organisation, opportunities to switch off from work are often few and far between. At Pro Start Pensions, we understand these challenges and the pressure and constantly work with clients to plan ahead, taking a proactive rather than reactive approach to finances. While this helps avoid snap decisions further down the line, as we have seen in recent years, unexpected issues that need to be addressed can still arise.
In this article, the primary focus will be on business financial planning, although we have also introduced personal and employee financial planning. It can be challenging to wear your business hat and quickly switch to a personal hat when considering tax implications on your finances. As an unbiased third party, while obviously putting the client front and centre, we can provide you with a balanced approach to both situations.
Business financial planning
It can be difficult to understand the pressures and responsibilities until you step in the shoes of a business owner/executive. Balancing the need for various business protections against cash flow, profitability, and long-term business viability takes time and planning. In a moment, we will look at several different types of insurance and protection, which create solid foundations from which to build your business.
While some business owners may view them as unnecessary, they can be invaluable in certain situations. They will also allow you to sleep at night!
Shareholder protection
Continuity and consistency are critical to the long-term success of any business, creating a balanced team that works well together and a company that has focus. If a business owner or critical shareholder were to experience a long-term illness or death, this could cause problems with their shareholding and the future of the business.
Shareholder protection, taken out by the business on behalf of shareholders, would provide the remaining shareholders with sufficient funds to buy back the shareholding in question. From the outside looking in, this may seem relatively cold and calculated, planning the acquisition of shares of somebody with a critical illness or someone who had passed away. In reality, this provides funding to bring the share stake back in-house and gives the business a degree of stability; it can also provide the shareholder with additional funds at a difficult time.
In the case of a deceased person, the trustees of their estate must do what’s best for the beneficiaries, which may not align with the plans of the remaining shareholders. Therefore, the ability to buy back the shares at a “fair value” offers a prompt solution for all parties.
Key person insurance
Whether a business owner, co-business owner, adviser or an employee, if you can’t quickly identify key personnel, it may be you!
A key person is somebody with skills, knowledge or experience essential to the business’s continued financial success. When discussing key person insurance, there is a tendency to focus on business owners and shareholders when, in reality, several employees may hold key positions. In the words of Steve Jobs:-
“It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”
The loss of such key personnel, whether through critical illness or death, can leave your business vulnerable and may result in reduced profitability during a period of reorganisation. Key person protection insurance will provide funds to cover a range of different issues, such as:-
- Bolstering cash flow
- Recruitment costs
- Business continuity
The degree of funding required will vary from company to company and key person to key person, but you need to review and address it regularly. In recent years, high inflation has seen many businesses experience a significant increase in their running costs, increasing funding requirements on the loss of key personnel.
Business loan protection
The role of the business owner and company director often involves personally guaranteeing various forms of finance to help the business. A personal guarantee may be the difference between approval and rejection, or can sometimes lead to reduced interest rates. This could include overdrafts, commercial mortgages, commercial loans, and directors’ loans. Consequently, business loan protection could be the difference between closing the doors and continued trading if the company owner or director suffers a critical illness or death.
Repaying outstanding debts can significantly enhance the strength of the business and precipitate third parties calling in loans. Even a relatively short-term hit to cash flow can have enormous consequences for any business. Business loan protection ensures that funding is made available to cover existing debts in what can be challenging times.
Executive income protection
The skills and experience of a company executive are often taken for granted until they are unexpectedly removed!
Executive income protection provides additional funding if an executive becomes ill or injured and cannot work. Balancing cash flow can be challenging at the best of times, but a task made more difficult with unexpected costs. Therefore, this type of insurance can be used to cover:-
- Employee sick pay
- Earnings
- Dividends
- P11D benefits
- Pension contributions
- National insurance contributions
Creating a financial safety net provides a degree of protection for the business and the executives. It also allows companies to fulfil their legal obligations about sick pay and even enhance payments where possible. Often used as a helpful marketing tool, it can assist with employee retention and attracting high-calibre personnel in the future.
Relevant life plans
This type of tax-efficient life insurance/death-in-service policy is popular amongst directors of limited companies and smaller businesses looking to provide additional employee protection. While many larger companies will likely offer life insurance/death-in-service cover as part of their group pension, this may differ with smaller companies. To qualify, each individual must be employed at the time of death and be under 75 years of age.
Relevant life plan premiums are tax-deductible against company profits so long as the benefits are paid to the employee’s beneficiaries.
Workplace pension schemes
Under current legislation, employers are legally obliged to invite qualifying employees into a workplace pension scheme. A minimum of 8% of the employee’s wages are paid into the pension scheme, a minimum of 3% from the employer and the balance from the employee. We have helped many business owners set up workplace pension schemes, ensuring qualifying personnel are invited to join, and members receive the appropriate documentation and updates.
Purchasing company premises using your pension
Whether using a SSAS or a SIPP, you can potentially use pension funds to purchase your company premises and lease back on commercial terms. The important condition here is “commercial terms”, which helps avoid conflicts of interest and the temptation to lease back on submarket terms. When looking to acquire property, there is also the option to secure borrowings up to 50% of the net value of the pension scheme.
Reducing corporation/personal tax liabilities
As a business owner, financial planning involves using all available allowances for corporation and personal taxes. For example, pension contributions can be offset against company profits, enhancing your pension pot and reducing your corporation tax liability. Also, the government recently announced changes in the treatment of business investment, more of which can be offset against your profits, providing another means of reducing corporation tax while investing in your company.
In isolation, many allowances and ways to reduce corporation/personal tax liabilities can appear relatively modest. However, the cumulative impact is often significant, and it is certainly something that you should discuss with your adviser.
Financial planning for your employees
In recent years, we have seen a trend towards providing financial planning services for employees, an area in which we have been highly proactive. Feedback from our customers confirms this helps to reduce employee stress levels and allows them to maximise their finances in the short, medium and longer term. Marketed as an additional benefit, it can also help to attract high-calibre personnel in the future.
We provide this service via seminars and “drop-in” clinics, which help employees better understand their finances, look at ways to enhance their funds, save money and protect current funds and assets. It is proving especially popular amongst those moving towards retirement, unsure of their options and looking for guidance.
Summary
Whether looking at company profits or personal wealth, it is as much about protecting what you have today as enhancing future returns. We advise and guide business owners, allowing them to create financial safety nets within their company and concentrate on day-to-day operations.
Introducing financial planning advice for employees benefits the company and individual employees. While more prevalent in recent times, we all suffer from a degree of financial pressure, much of which can be attributed to misunderstandings or limited knowledge. Teaching employees how to manage their finances better and plan ahead to avoid uncertainty and volatility can pay huge dividends in the long term.
If you would like to discuss the benefits of business and personal financial planning, please get in touch with one of the team today.
