By Nick Heath, Head of Business Development, Seven Investment Management
…saves nine is a proverb that I learned as a child. While those of you hoping for a lesson in sewing from me will be disappointed, I’m confident that the phrase’s theoretical point will be relevant to lots of you in the Family Business Network.
This certainty stems from my role on the business development team of Seven Investment Management (7IM). It’s a role that often sees me having the very first conversation that someone will have had with an investment manager. It’s often the case that lots of people haven’t really thought through how their finances will need to be managed to ensure that their future, and particularly their retirement, is going to be comfortable.
I found that this is particularly the case with family business owners for a couple of reasons.
Firstly, there is often less delineation between business and family time. Because your business is often much more personal than a regular ‘job’, it can mean that there’s no ‘9 till 5’ structure to your day. So when you go to your computer in the evening or on a weekend to just print something off, the business can pull you in.
Another reason is that many family business owners view the business as part of their pension. You can easily justify spending time on growing the business given you see that as providing for both for you in the future and for the next generation.
The classic reason for procrastination also applies. It takes a lot of time and soul searching to answer the difficult questions around retirement. You’re planning for a lifestyle that you’ve yet to define, that will be enjoyed at some point in the future, but starting from a date that you’ve yet to determine. Planning what the next phase of business growth might be is far more tangible and the outcomes are more likely to be enjoyed more immediately.
My job is to convince people to grasp the nettle – another phrase picked up from my mother – and make some of the decisions about your future plans and aspirations. These will save you time in the future and help ensure that you’ll be more on track for that comfortable retirement. Some of the reasons I’ve found resonate are:
- You might miss out on government contributions. You’re used to the government taking money, but many don’t think through the value of the tax relief that’s available with pension contributions. If you are a higher rate taxpayer, contributions to your and your spouse’s pension would benefit from 40% in tax relief. The initiative cost the exchequer £41bn in the 2016-17 tax year, according to HMRC estimates. You can even backdate payments up to three years if you have a registered scheme set up.
- Any investments benefit from compounding. It’s well known that investments can go down as well as up to the extent that your original investment is impacted. However, by way of an example, any money invested at an annualised 7% return (after fees and charges), could double in 10 years. There’s also the opportunity to benefit from compounding on your investment returns if they’re reinvested, alongside any bond coupons and share dividends due, because you hold the underlying investments. By selecting the Accumulating versus the Income version of an investment fund, and while past performance can never be a guide to future returns, our second example can highlight how this could play out. Looking back at the FTSE 100 performance, the index is only 9% above its previous high level in 30 December 1999. However, if you had reinvested dividends (which isn’t included in the index performance), you’d actually be up by 112% over that same period (as at the time of writing).
- Your family could benefit from another income stream in the future. As your business grows, it’s easy to foresee that it could be supporting you and the next generation. As such, a pension could give your family another income stream that would also diversify your income. This income would support the business, whether you’re planning to step aside or not, and it’s an income that has grown and should perform in the future in a very different way to any proceeds from your business.
If any of these points makes sense, but you find that you’re still reluctant to pick up the proverbial needle and thread, this is where a professional can help. The chances are you’ve probably already outsourced a task that you used to do yourself to someone else, particularly if your business is a success. So perhaps now might be the time to get some help for your finances too and save time in the future that could be spent on making your business even more of a success.
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority and the Jersey Financial Services Commission. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.