After having worked for many years building up your business and then ploughing time and energy into its sale; it is important to take the time to reflect on both where you are now and what the future holds. Your life will evolve in different ways following this sort of major change and you may wish to consider matters such as:
- If you have a partner are they looking to retire as well, what are their wishes?
- How will you fill your time? Are you keen to work still, perhaps for someone else in a field related to your business or maybe something completely different?
- Would you like to offer your time and skills to a charity?
- Are you considering moving home and/or area, perhaps to be closer to children?
- Do you have a ‘bucket list’ that you would like to start ticking off?
- Are there hobbies you wish to pursue?
Asking these questions to understand how you and your family want to spend your time and finding the right balance of activities for you is crucial to feeling content and being fulfilled.
Selling a business and retiring is a major life event. So in addition to considering the emotional and fulfillment aspects of this, you need to ensure your finances are robust and working as hard as possible for you. This is where a financial planner can help you by providing you with a holistic overview and will ask you to consider your priorities and your objectives in this new phase of your life.
Before even tackling the cash from the sale of the business, the first step that your financial planner will work with you to understand is what your expenditure will be going forward. Looking at food, property costs, leisure and a rough estimate for holidays.
Then your planner, will work with you to work out your income. From an income perspective, how much will you receive from sources that are not reliant on an investment return to produce income. Examples would be state pension or ‘final salary’ company pension schemes. The planner will look to understand the wider picture, so if you have a spouse or partner, what will their income be and where will it be coming from?
A fairly common scenario is that one person has most of the income potentially wasting the others personal tax-free allowance, which is currently £12,570. The planner will look to see if anything can be done to utilise this.
Once you know what income will receive from non-investment sources you can see how much will need to be provided from pensions and investments that are reliant on an investment return.
My first consideration to allocating current investment/business sale funds would be to make sure you have an adequate cash reserve. This is particularly important in the early years of retirement as, to some extent, it is an unknown for the varied reasons outlined earlier. Be cautious and keep a decent percentage in cash, at least for the first couple of years.
I would then look at maximising any tax efficiencies we can. This would start with pensions and the potential to use past income, (salary not dividends), to make a large initial contribution on which you would benefit from tax relief, tax-efficient growth, and inheritance tax advantages as pensions are not covered by inheritance tax. You can also access the fund if needed in order to bolster income in later life.
I also like to recommend that you contribute to a pension up to age 75, (you don’t need an income to do this). You can put £3,600 gross (£2,880 net) into a pension per year, giving you a tax boost of £720 p.a. and building up a smaller extra fund for later retirement and moving a little more outside your estate for inheritance tax purposes.
Once pensions have been maximised, additional funds can be invested in a portfolio aligned with your attitude to risk. ISAs allow £20,000 pa to be invested which then grows tax-free.
Having made sure you are secure in terms of cash and income, you may wish to consider the other end of your retirement and how to pass funds to future generations tax efficiently. You will need to consider if you want to reduce the inheritance tax bill for your family and if so, to what extent. Some people take the view that beneficiaries will inherit a large lump sum and if some tax is paid so be it. Others may wish to make substantial charitable bequests or consider an insurance arrangement insurance to mitigate the bill for their families.
It’s important to clarify your views and then take advice with regard to a gifting strategy and investing in an inheritance tax-effective way.
Financial Planning by TaxAssist work as holistic financial planners putting you and your family at the centre of our advice. Including us in your future planning will add value in many ways. Contact us for an initial fee-free consultation.
Author: Jonathan Cross DipPFS
With over 30 years of experience within the financial services sector, Jonathan is a qualified Independent Financial Planner with a friendly, professional, and easy-to-understand approach to providing independent and impartial financial advice.