We recently wrote an article on the advantages of financial planning which can be found here.
This was followed up with an article demonstrating the benefits of financial planning for parents.
And this was based on the profile of a real client.
The feedback to that article was very positive as there is no better way to outline the benefits of financial planning than a real case study.
As the feedback was so positive I’m going to stick with the real case study theme and this article will demonstrate the value of financial planning to business owners.
Business owners are busy people, we have so much to do.
Staffing, business development, finances, employee benefits, just a drop in the ocean.
We don’t have an infinite amount of time, unfortunately.
Business owners get caught up in the running of their business on a day to day basis and take their eye off the ball when it comes to personal finances.
I recently wrote another article outlining financial risks to business owners, this can be viewed here.
Recently, a business owner (who is now a client) contacted me.
He was having some tax issues and wanted to get a pension set up through his Ltd Company in which he is a 50% partner.
The Situation
The business owner had no executive pension set up through his company and his business partner had told him of the advantages of having one.
The business partner had correctly outlined it’s a good way of moving money tax efficiently from the company balance sheet to his own personal balance sheet.
We scheduled an introductory call with the business owner and his wife and the sole initial query was as follows:
- The business owner had no executive pension set up and they wanted to discuss the advantages of this
The Journey
Discussion
During our initial discussion, we, first of all, addressed the clients immediate need.
Plain and simple.
He had surplus funds in the company so we had to set up an executive pension to move these funds into.
However, through our discovery process, we had a further in-depth conversation.
I asked the business owner and his wife some challenging questions like:
- If the business owner couldn’t work due to illness or injury, how would he pay himself?
- Do you view the business as your largest asset?
- What would happen to the business if one of the partners pass away?
- Would the owner’s wife like to assume control of his share of the business?
- If so would she have the necessary skillset (or interest!) for this?
As a side issue, we also discussed various life and serious specified illness policies they had in place currently being paid from after-tax income.
Gathering the information
The client kindly completed our online financial planning questionnaire.
They also signed an authority for us to get access to their existing life cover policies.
We gathered all relevant details for the various arrangements they have in place.
Preparing the Analysis
We reviewed all of the information we received along with the completed financial planning questionnaire.
The key issues we identified for discussion with the business owner client and his wife were as follows:
- Set up an executive pension – their immediate need and requirement
- Risk management – their plan to replace the husband’s income if he was unable to work due to illness or injury was to draw down on the cash assets within the company along with receiving the state illness benefit
- Cash sitting on the company balance sheet with the husband currently refusing to draw on it and pay income tax, USC and PRSI
- Business succession planning – they had never discussed what would happen to his shareholding if he were to pass away
Business succession planning is a subject that should be on every business owners agenda.
Discussing the findings
Following the analysis, we met again and reviewed the findings.
We agreed immediately to set up an executive pension in line with their specific need.
We discussed their plan to draw down on the company cash assets should the business owner client be unable to work due to illness or injury.
I highlighted to them this made no sense as it depletes the value of their business asset when the income into the business may be reduced.
Also, the business owner client is not entitled to the state illness benefit which they didn’t know.
Since our initial meeting, they had spoken with each other about succession planning.
They agreed that if the husband was to pass away, the wife would have no interest in the business.
She has no experience or knowledge of that industry so would look to sell the shareholding – and get a fair price.
Implementing the strategies
Following agreement on the issues, we implemented the following solutions:
- Set up a new executive pension for the business owner through the business
The pension allowed us to get money off the company balance sheet tax efficiently by back funding the pension for previous years
- We protected the income against illness or injury – this is tax-deductible for his company
As a side benefit, we also put in place a death in service policy through the company.
This covers the business owner for 4 x his salary and is completely tax-deductible for the company.
Business succession planning is now being discussed.
My client and his business partner are now actively in discussion about having an efficient business succession plan in place.
We had a call with all three of us and they now understand the importance of having a proper plan in place should either of them pass away.
The business partner also discussed with his wife and they are also in agreement his spouse has no want to move into the business.
This is not an arrangement that gets sorted overnight but there are now active discussions and plans for this and getting a business protection arrangement in force.
Read here 5 reasons why business protection makes sense.
If you are a business owner and would like our free guide to protecting your shareholding, leave your name and email address here.
The benefits to the clients
My business owner client and his wife now have peace of mind.
If he is unable to work due to illness or injury, his salary is protected and will still be paid.
There is no additional outlay here as the company cover the cost and he preserves the cash value of his asset – his business.
In previous articles, I’ve reiterated the sound foundation of any financial plan is to protect what you have.
My client now has his income protected with additional lump sum death in service at no cost to himself.
The pension is in force, addressing the clients immediate need.
Money has transferred from the company balance sheet to his own personal balance sheet – tax-efficiently.
No income tax, no USC, no PRSI.
A side benefit here, which is underplayed, he is removing his reliance to sell the company to fund his retirement.
No one wants to be relying on selling something to fund retirement. What if it’s not a saleable asset? Or it’s a bad time to sell when you want to finish?
A proper business succession plan will be finalised in the coming weeks using business protection.
As I’ve said a number of times, the majority of business owners don’t consider this enough.
We can all get sick. We can pass away.
And we, as business owners, have to make effective provision for this to protect our families.
One immediate need at the initial point of contact and now 5 key benefits and solutions in place.
Above all, the peace of mind that good financial planning and discussions create.
Key takeaways
The client came to me with a specific need – set up a pension.
Most clients do actually come with a specific need.
However, following the full review and an open discussion, we managed to provide a more holistic, rounded service to the clients.
The end result is a very cohesive financial plan and strategy both in their personal and business lives.
Contact
It’s simple and it’s effective.
If you are a business owner and want to plan proactively or have a financial need request a callback.
You may want to avail of our second opinion service.
Alternatively access the diary and schedule a call with us at your convenience.
Or call me on 086 0080 756 for a simple initial discussion at our expense.
Francis McTaggart CFP® SIA RPA QFA
These blog posts are intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
To discuss engaging the services of Fortitude Financial Planning please email us at info@fortitudefp.ie.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts
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