For those of us born after 1970, the state pension age is now 68.
And let’s be honest – the thought of working until you’re pushing 70 and then hanging up your boots doesn’t really work for most entrepreneurs!
When you’re brilliant at what you do and you love doing it, the traditional way of retiring just doesn’t hold the same appeal. I bet you can’t imagine yourself sitting in front of the TV, drawing a pension for the rest of your life? Me either!
And the great news is you don’t HAVE to.
More and more, us business owners are looking at retirement as a time to work less hard, rather than stopping completely.
Maybe you’d love to travel more and take longer holidays. Maybe it’s about working in a different way, freeing up time to do other things (like writing your book or bringing your passion project to life!). Which means you’ll need some money to top up your income, so that your standard of living doesn’t dip.
Modern retirement looks different for business owners – because you’re likely to want to start taking money earlier and in a much more flexible way than in days gone by.
So in today’s blog, we’re talking about how to make sure the money is in the RIGHT place at the RIGHT time. Without getting caught up in one of the many pension scams that seem to pop up from nowhere!
Let’s start with pensions and when you can take them, so you can start to get clearer on how it all works.
Pensions are one way to save for your retirement and there are 2 main types:
1. Defined Benefit Pensions
You might have also heard these called ‘final salary schemes’. Usually they are centralised pensions – like for teachers, the NHS and the police or fire service – but in the past, they were also offered by big companies like Marks & Spencer, Boots and Sainsburys.
You and/or your employer will have paid in a percentage of your salary each year, which will guarantee you a certain income when you reach the scheme retirement age (which may be 60, 65 or 67).
You’ll know if you have one of these from an old job, because your pension statements will talk about ‘years of service’ and the figures on it talk about a pension of a certain amount per year.
How do I find out about old pensions?
One question I get asked a lot is “how can I find out about old pensions – from when I worked for someone else ages ago, but haven’t paid into them for years?”
Well – dig through your old paperwork and if you know which company holds the pension, then contact them directly. It might be an investment house like Aviva or the Pru or you may need to contact your former employer, to ask for details of who manages their scheme.
It’s also worth checking the gov.uk website to see how much state pension you’ll be entitled to. Obviously you won’t get this until you’re 67, but it’s useful to know when working out how much you need to be saving for your retirement.
2. Defined Contribution Pensions – aka Money Purchase Schemes!
Pretty much all pensions these days are this type. You pay in each month to create a pot, which you can use when you retire in any way you choose.
Your employer is allowed to pay in too. So as a business owner, your limited company can pay into the pot and historic pensions you hold (like from previous jobs) may be a mixture of employer and employee contributions.
The money is invested in a fund, which will hopefully grow over time – but your income in retirement depends on how much you put in, how much it grows and how and when you choose to take it out.
You can normally take out money from these pensions anytime from age 55.
So what if you want to be able to access the money BEFORE you’re 55 – because you want to retire early or reduce your working hours?
You CANNOT do this with a pension. And if you see something saying that you can, it’s likely to be a scam!
The general rule is that unless you are terminally ill, you cannot take money out of a pension before you are 55.
But there are lots of scams which purport to be the answer to this.
They talk of ‘releasing pension funds’ and ‘freeing up’ pension funds and they always result in you losing your money.
Typically, they’ll ask you to sign forms to move your money to their special investment fund so that they can release your cash – and then they’ll disappear and take your money with them.
But it gets worse…
Because officially you’ve accessed your pension funds before age 55, you get a 40% tax charge on the money withdrawn. Even though you NEVER received a single penny.
So not only is your fund of say £100,000 gone – you then get a bill from HMRC for £40,000 payable in 28 days. Plus you’ve probably paid them several hundred pounds upfront, to move your money.
Life savings wiped out, pension gone and a massive tax bill.
So if you ARE going to want or need your money before age 55 – you’re going to need a better way to do it!
There are 3 other main streams of income that can be used as part of your retirement planning, to make sure you have flexibility around when you can access your money.
Here’s a quick overview of each:
With an ISA, you can put in up to £20,000 a year and then take the money out at any point in the future, with no further tax to pay.
You’re still looking at locking the money away for at least 5 years, so that it has time to grow and invest in a collective fund to manage the risk level.
So careful financial planning is still needed, to make sure you have cash to hand should you need it in an emergency!
2. Rental Property
Having rental property means you can both create an income stream that continues into your retirement AND have an asset that increases in value over time.
However, ‘putting your money into property’ isn’t always the golden solution it’s often made out to be!
Being a landlord can be hard work, with unexpected expenses along the way (like a new roof or boiler) that will need funding. And if you need to access the money quickly, it can be a problem, because you’d need to give notice to your tenant/s and sell the property to release the cash.
So property can be a great option – but again, careful financial planning is needed, to make sure you’re covering yourself from all bases.
3. Your business!
Is there part of your business that could carry on, without YOU needing to go to work day-to-day?
Could you take on someone else to do your role? Or create a passive income product so you can still draw an income from your business, yet be more hands off?
For all of us in business, there’s pretty much always a way to make this work (even if it’s not always obvious at first!).
In reality, it’s likely you’ll want a combination of all 3 of these options PLUS your pension, to give you the flexibility you need.
I hope today’s blog has given you some inspiration about what you need in place, to live the life you really want once you’re ready to step back from working so hard into ‘retirement’ (in inverted commas – whatever that looks like for you!).
I know that may feel a long way off right now.
But the truth is that NOW really is the time to start planning and saving for your future, while still having the lifestyle you want today. Because the sooner you start, the longer your money has to grow.
And if you’d love some support and guidance, to take total control of your and your family’s financial future – that’s where I come in!
I’m a Money Coach and award-winning Qualified Financial Adviser, featured in The Telegraph, Moneywise and a regular guest on BBC radio. I’ve worked in financial services for almost 15 years now, helping women like you to walk into wealth feeling enriched, empowered and excited.
I’ve built my dream life (including buying my dream home, with alpacas in the garden)…and now I’m here to help you build yours!
This isn’t stuffy financial planning – but straight-talking, real-world steps to build the future you REALLY want, wherever you’re starting from.
Until next time,