Owning a business or starting a business can be extremely rewarding.
Failure can be equally as devastating.
As business owners one thing we lack is time.
We consistently get caught up in the day to day running of our businesses.
Business development, meetings, staff issues, accounts to name a few. Making money!
To avoid the price of failure, it’s not uncommon for business owners to put the financial side of their business before their own personal financial interests.
This can be costly and can then leave us exposed on a personal level, to risks such as:
- The financial impact to you and your family if you can’t work due to illness or injury
- The knock-on effect financially this would have on your long term retirement plan
- The financial exposure to the business should one of your business partners die
- Indeed, what happens to your shareholding if you die? What is the impact on your family?
- Not allocating enough money to your long term retirement plan
- Not being able to sell your business as planned at retirement for whatever reason
- The financial loss of income your family would suffer if you passed away
All very viable risks that as business owners we have a duty of care to both ourselves and our families to acknowledge.
However, solutions exist that can mitigate these risks.
The Limited companies we run can provide these solutions.
They can provide the umbrella to protect against these risks.
With some simple changes, your company can provide all-rounded protection against these risks.
Schedule Your No Obligation Chat
Solution #1 It can protect your income against illness, disability or injury
What income do business owners have if they can’t work due to illness or injury?
We don’t get the state benefit. (That’s only €10,556 in any case!).
Our reward for showing entrepreneurism is no support from the Government.
We’re then faced with drawing down on the cash assets of the company.
This is at a time when income into the company may be reduced or even ceased.
We have to draw down on the value of our company to pay us a salary.
None of us likes to consider getting injured or sick or suffering a serious illness. We don’t like to think these things happen to us.
But they can. And they can stop us from working.
Looking at Aviva, the largest provider of income protection on the market.
The average age of an income protection claimant in 2020 was 48.*
41% of claims were male and 59% of claims female.*
The three top reasons for claims in 2020 were psychological, orthopaedic and cancer.*
As business owners, your company can fully cover the cost of protecting your income in the event of illness or injury.
And the cost is tax-deductible as a business expense.
The benefits of this are:
- If you get injured or ill, you can focus on what’s most important, getting well enough to return to work living your life
- The value of your business is retained as you are not drawing down on cash reserves
- You won’t have to live off personal savings and
- Personal peace of mind
We can’t say this will happen to anyone but why take the risk when it can easily be guarded against?
Schedule Your Income Protection Consultation
*Source – Aviva claims department 2020 claims statistics.
Solution #2 It can cover your pension contributions up to 33% of your salary if you are unable to work due to illness or injury
In keeping with protecting your income, your company can cover your pension contributions also.
So if you are unable to work due to illness or injury, as well as covering your income, your pension contributions can be covered also.
Up to a maximum of 33% of your salary.
Solutions 1 & 2 give you the solid foundation of any effective financial plan.
These are the most important purchases you will ever make.
One of your main assets is your ability to earn an income.
You would insure your car, home, other business assets and even your pet.
Why wouldn’t you insure your income at no personal cost?
Solution #3 Your company can ensure business continuity if one of the shareholders pass away
The death or serious illness of a shareholder can cause immediate financial hardship for the remaining shareholders.
They can even lose control of the business.
On death, a shareholders shareholding usually passes to their next of kin.
The next of kin will likely want to be bought out of the business.
Will the surviving shareholders have the funds to buy them out?
If not what is the alternative? The next of kin or the deceased’s children moving into the business?
A competitor purchasing the shares from the next of kin?
The surviving shareholders taking personal loans to cover the cost?
When a death occurs, it is an emotionally traumatic time both for the deceased’s family and the surviving shareholders.
It’s important that plans are in place to ensure the smooth continuity of the business at this time.
By using business protection as part of your succession planning, cash is released, the surviving shareholders acquire the deceased’s shareholding and the deceased’s next of kin receive fair value.
This is the best outcome for everyone.
As business owners, your company covers the cost of this.
There is no personal outlay to protect one of your most valuable assets (alongside your income!) – your shares.
Discover 5 reasons why business protection should be part of your succession plan.
Solution #4 Your families interests are protected if you die
A by-product to solution #3, when a shareholder passes away, a smooth, known resolution is best for all at a traumatic time.
You’ll want your own family to realise the full value of your shareholding. The value you have worked so hard to build up.
What happens if your business partners don’t have the necessary capital to purchase your shares?
Would your family have to accept a lower sum than what the shares are actually worth?
Do you think your spouse would want to work in the business in your place? Do they have the knowledge to?
Would your business partners want them in the business?
Business protection as part of business owners proper succession planning ensures a smooth transition for all parties involved at the most traumatic of times.
The surviving business owners acquire the shares and move on.
One of your most valuable assets is protected, families interests are protected and they receive fair value.
And again, no personal cost.
Solution #5 Directors Pension – Gift Yourself €2m
A business owners pension, more commonly known as an executive pension or a directors pension simply turns your companies profits into personal wealth.
It facilitates the transfer of money from the company to yourself – tax efficiently.
And €2,000,000 is generally the maximum allowable pension fund. However, your own personal figure is based on relevant facts.
Facts such as your age, gender, salary, desired retirement age to name a few.
We can calculate your number for you.
Your pension removes your reliability on selling your company to fund your retirement.
It allows you to sell the company when you want to, not when you have to and this puts you in control.
If you are relying on selling your company to fund your retirement you’re not in control.
For whatever reason, you may not be able to sell it.
As business owners it’s important we create a long term plan independent of selling our business.
Discuss A Pension Review of Existing Benefits
Solution #6 Tax-Free Cash Payment of €200,000
Sticking with the pension, your pension can pay you €200,000 completely tax-free.
A pension carries many benefits but this is the jewel in the crown.
You can take 25% of your pension tax-free.
If you have a fund of €800,000, 25% is €200,000.
Alternatively, if you have 20 years service at retirement, you can withdraw 150% of your salary tax-free.
As an example, if you retire on a salary of €80,000, have 20 years of service, you can receive €120,000 tax-free from your pension.
This is from age 60 onwards and you don’t have to actually retire.
When we say tax-free we mean tax-free.
No income tax, USC or PRSI. No Capital Gains tax.
Read more about pension retirement options here.
For this reason, it’s never too late to start funding a pension.
If you are age 60, have no pension and expect to have 20 years service, you can fund a pension to 150% of your salary and take it out completely tax-free.
Variables dictate what you can and can’t do.
The best thing is to contact us to discuss your options.
Solution #7 Life cover with tax relief
As with solution #1, we don’t like to think about getting sick, injured or even dying.
It means we’re faced with our own mortality.
But it happens and it can happen to anyone.
I’m sure everyone knows of someone who died young. I know a fair few.
We only have to look at life insurance claims statistics.
If you die, your company can pay your family up to 4 times your current salary.
Assuming this passes to your spouse, this would be tax-free.
So, if you earn a salary of €75,000, your spouse could receive €300,000 tax-free.
Added bonus – the cost of this, like the income protection, is tax-deductible for the company as a business expense.
No personal cost. Why pay for life cover out of after-tax income when it can be tax-efficient?
This may never happen but why take the chance?
As business owners this is a quick and easy win.
Review Your Existing Life Insurance
To Summarise
Every business owner wants to make a success of their endeavours.
We work hard and we work long hours to build up a valuable asset.
However, some heavy risk exposure can cause significant damage to the work we put in.
A few simple changes and arrangements can mitigate these risks and at the same time, separate and protect your personal financial interests from your business financial interests.
How we help
We have helped many of our business owners plan for the above.
We take it step by step so as not to convolute the process, we like to keep it simple.
It’s our aim to simplify this stuff for you as much as possible and ensure you and your families interests as our clients are protected.
We can help you with all of the above and if you would like us to call you to discuss please request a callback.
Alternatively, call me on 086 0080 756 or drop us an email, francis@fortitudefp.ie.
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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