Owners of Business Neglect Own Finances

Business owners are increasingly reliant on their business as a "job for life" which will pay for their retirement, and this is leading them to neglect planning for both their personal finances and the succession of their business.

Research undertaken by Crimson Publishing on behalf of accountancy firm Kingston Smith LLP revealed that over half of entrepreneurs have no pension plan in place, and are instead relying on their business to be their pension.

Just 49% of entrepreneurs claim to review their personal finances regularly, and 29% admitted they had not done so in the last twelve months. On April 6th 2006, the government introduced Pensions A-Day, a new universal regime governing the taxation of pensions designed to simplify the system. Under the new rules, there is now no limit to the amount that can be paid into a pension scheme but there are new restrictions on tax-free payments, and the minimum retirement age has increased. An overwhelming majority of those surveyed displayed a lack of awareness of how these A-day changes would affect them, with 93% admitting that they had not taken any action in the light of the reforms. 85% are also failing to seek financial advice on how to protect their finances in the event of a change in personal circumstances such as marriage or divorce.

The findings revealed a significant gap between expectation and reality. While 39% of business owners expect to net £1 million or more from the sale of their business, this may not be enough to fund the kind of retirement they envisage. Nearly two-thirds of business owners would not reach the upper tax bracket income threshold of £50,000 per year if they took early retirement at 55. This is also assuming that the business is saleable - nearly one fifth of entrepreneurs will get nothing at all from the sale of their business.

Andrew Straw, head of private client group and partner at Kingston Smith, commented:
"Entrepreneurs may feel that by running their own businesses they are taking hold of their own destiny, but their failure to plan adequately for the future could seriously undermine their prospects of profiting from their hard work."

"While it is tempting for entrepreneurs to let day-to-day business priorities come first or plough every penny back into the business in the belief that it will be their 'pension' which will take care of them in your old age, this is a high risk strategy."

With so many entrepreneurs relying on the sale of their business rather than alternative wealth management, it is essential to maximise the profits that a sale could generate. Seven out of ten entrepreneurs plan to stay with their business for ten years or more, but waiting until retirement to sell up is not the only option. Being prepared to sell when interest in the particular sector is at a peak can be highly profitable, as in the case of Green & Black's timely sale to Cadbury's. At the very least, an exit strategy should be in place at whatever stage the business is at, and then reviewed every few years.

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