Is my business my pension?

As a business owner, sometimes your business is one of the biggest assets you have. It’s how you make your money and you’ve invested time, money and effort into it.

It’s also probably your biggest priority.

When planning for retirement you might have decided not to prioritise saving in a pension, needing to spend the money elsewhere.

You’re not alone, last tax year only 340,000 self-employed people paid into a pension. And there’s around 4.24m self-employed people in the UK.

You might be planning to retire by selling your business or by profiting from the income while someone else runs it instead.

Here are three reasons why you should consider investing in a pension as well as running a business.

This isn’t personal advice. If you’re not sure what’s right for your situation, you should ask for financial advice. You normally can’t access a pension until age 55 (rising to 57 from 2028).

You need a back-up plan

Pinning your hopes on retiring based on just your business is a risky strategy as all your eggs are in one basket.

If your business ends up in difficulty just before you retire, there’s no plan B.

One of the benefits of investing in the stock market via a pension is that you can take advantage of diversification.

This means investing in different industries, countries and types of investment without too much effort.

You might not be able to get that level of diversification from your business without working very hard.

And the benefit of diversification is that if one area does badly, others might fare better and make up for it. It reduces the overall risk of your investments. Remember all investments can fall as well as rise in value, so you could get back less than you invest.

Find out more about diversification

It’s not a lot of effort

One of the things with selling or running a business is that it takes a lot of work. And you might not be able to leave it at the time you hope to.

Either because you might not get the money you want from selling it, or because you can’t find the right buyer. The amount you’ll get is also very unpredictable.

But you don’t want to end up working longer than you want to. Especially if things aren’t going as well as you planned or your health means you’re less able to keep up with things.

Having a pension might give you the security to step back and retire on your terms when you need to.

And while you have to monitor your investments from time to time, it’s often not the same amount of work as running a business.

You can take a hands on approach, picking your own investments. Or you can leave a lot of the work to experts and choose ready-made investments.

There are tax benefits

Saving into a pension is one of the most tax efficient ways you can save for retirement. And if you're self-employed or work for yourself, it can also help you cut your tax bill.

The tax benefits of paying into a pension are different based on whether you're a sole trader, part of a partnership, or a business owner.

If you're a sole trader or part of a partnership, you can make personal contributions to your pension, which will qualify for tax relief. UK residents under age 75 can usually pay in as much as they earn and get 20% from the government in tax relief. If you pay tax at a higher rate you can claim back up to a further 25% through your tax return. Scottish tax rates and bands are different.

The amount that can be paid into pensions without triggering a tax charge is limited by the annual allowance - which is £60,000 for most people, but may be as low as £10,000. You are also limited by your earnings (this will be any profit before tax which you declare to HMRC in the current tax year).

If you’re a limited company owner, you can make employer contributions to your pension from your company account. These contributions can normally be treated as an allowable business expense and offset against the company’s corporation tax bill. You won’t pay employer or employee National Insurance on the contribution. Employer contributions aren’t limited by earnings but are still subject to the annual allowance (£60,000 for most people).

You can also make personal pension contributions to your pension if you're a limited company owner, but it might not always be the most tax efficient option. Personal contributions are limited by the annual allowance.

Remember pension and tax rules can change, and benefits depend on your circumstances.

Discover our pension options for the self-employed