Drawdown

Jaco70

I run a small business, the end value of which I’ve never given any thought to. This is because I don’t see it having a sale value. However, over the past few years I’ve added quite a bit to the balance sheet, by not taking too much out. At the moment it’s about 400k, and fingers crossed I might increase that a bit over the next few years. Would putting this into an investment fund, and drawing down from it, be possible? After retirement I mean. Obviously the cash in the company has already been taxed, so I’m thinking this seems like a good way to increase retirement income. I’ve heard people talk in terms of 4% drawdown, which seems very healthy to me if correct. I also own the premises that we operate from (personally, not within the limited company), so that’s a bit on top if I rent it out.
Any advice on the pros and cons very welcome. 

Marcon

Jaco70 said:

I run a small business, the end value of which I’ve never given any thought to. This is because I don’t see it having a sale value. However, over the past few years I’ve added quite a bit to the balance sheet, by not taking too much out. At the moment it’s about 400k, and fingers crossed I might increase that a bit over the next few years. Would putting this into an investment fund, and drawing down from it, be possible? After retirement I mean. Obviously the cash in the company has already been taxed, so I’m thinking this seems like a good way to increase retirement income. I’ve heard people talk in terms of 4% drawdown, which seems very healthy to me if correct. I also own the premises that we operate from (personally, not within the limited company), so that’s a bit on top if I rent it out.
Any advice on the pros and cons very welcome. 

It's not clear from your post who owns the £400K. The fact you've paid corporation tax on it is one issue, but until it's been paid out to you by way of salary and/or dividends, it isn't 'your' cash to invest and draw down on. Have you discussed it with your accountant, if you have one?

Do you and/or your business currently contribute to a pension arrangement of some sort? Otherwise it's certainly worth looking at your company making contributions to a pension arrangement on your behalf - up to £40,000 is possible, and sometimes more if you are eligible for carry forward (see https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward if you're not familiar with what that is). Such contributions are normally an allowable business expense provided you are genuinely working within the business and not just the owner/shareholder. Again, worth a chat with your accountant if this is novel territory for you.

Jaco70

150k was placed in an investment fund this year, as it was ‘spare’ funds, roughly 200k is bank balance and then somewhere between 50 and 80 in ‘stuff’, vehicles/stock etc.
I’m the director who runs the business and I own the shares (actually my wife owns 25%).

I totally understand that it’s not my cash, it’s the limited companies, and I wasn’t suggesting that tax only has to be paid once. The CT has been paid, but there will be income tax to pay when it’s taken out (that’s the main reason it’s been left in, because added to other income I have, the tax take makes it unattractive). But the tax issue would apply with any retirement income, including state pensions, wouldn’t it?

dunstonh

 Would putting this into an investment fund, and drawing down from it, be possible? 

Yes. but lots of clarifications needed.

After retirement I mean. 

also yes but again clarifications needed.

Obviously the cash in the company has already been taxed, so I’m thinking this seems like a good way to increase retirement income

Such as putting it into a pension.  Although you may have missed the boat somewhat if there is no corporation tax left to pay.

 I’ve heard people talk in terms of 4% drawdown, which seems very healthy to me if correct.

4% is an opinion figure.   In the UK, typically 3.5% is more common or 3% if you are in your 50s.

150k was placed in an investment fund this year, as it was ‘spare’ funds, roughly 200k is bank balance and then somewhere between 50 and 80 in ‘stuff’, vehicles/stock etc.

By you or the business?
What tax wrapper was used?

. The CT has been paid, but there will be income tax to pay when it’s taken out (that’s the main reason it’s been left in, because added to other income I have, the tax take makes it unattractive). But the tax issue would apply with any retirement income, including state pensions, wouldn’t it?

Yes but much reduced if you use the pension wrapper as that gets money out of the company, reduces your corporation tax bill, avoids dividend tax (unlikely you are paying income tax) and then has tax free growth in the pension whilst it is invested. It is outside your estate (so no IHT) and you only pay tax on 75% of what you draw and only above your personal allowance.

gm0

Another nuance to be aware of is that should you retire from revenue generating work for the limited and its activity tails off then the Ltd can cease being a "trading" company per its original articles/purpose and become an "investment" company simply by the fact that investment income from retained profits now is bigger than residual or zero trading income. 

If that happens the rules will shift on you a bit from what you are used to with the Ltd so far.

By far the simplest road is employer pension contributions to you as an employee these offset as a cost of the business with salary against revenues before profit and corp tax calculation.  But can't roll back time and reclaim CT from years ago for a pension decision now. 

Some land and other asset heavy generational family businesses use a SSAS pension for family members which is niche but can work well for some people.    Too much complexity and cost for a single director/small services limited vs just paying director and/or employees into a regular pension. 

Marcon

Jaco70 said:

150k was placed in an investment fund this year, as it was ‘spare’ funds, roughly 200k is bank balance and then somewhere between 50 and 80 in ‘stuff’, vehicles/stock etc.
I’m the director who runs the business and I own the shares (actually my wife owns 25%).

I totally understand that it’s not my cash, it’s the limited companies, and I wasn’t suggesting that tax only has to be paid once. The CT has been paid, but there will be income tax to pay when it’s taken out (that’s the main reason it’s been left in, because added to other income I have, the tax take makes it unattractive). But the tax issue would apply with any retirement income, including state pensions, wouldn’t it?

Indeed - so not sure why leaving it within the company is going to help the tax position? There's only going to be so much you can take out of the company (after you start drawing your state pension) before you are pushed into a higher rate tax bracket, so filtering some out now might make sense, rather than trying to further increase the numbers on the balance sheet. Could your wife's shareholding be increased so that she can have higher dividends, say, depending on her tax position?

It does sound as though a chat with a professional, rather than posting here and asking for suggestions based on virtually no knowledge of your overall position, could be one of your best investments.

Jaco70

Marcon said:

Jaco70 said:

150k was placed in an investment fund this year, as it was ‘spare’ funds, roughly 200k is bank balance and then somewhere between 50 and 80 in ‘stuff’, vehicles/stock etc.
I’m the director who runs the business and I own the shares (actually my wife owns 25%).

I totally understand that it’s not my cash, it’s the limited companies, and I wasn’t suggesting that tax only has to be paid once. The CT has been paid, but there will be income tax to pay when it’s taken out (that’s the main reason it’s been left in, because added to other income I have, the tax take makes it unattractive). But the tax issue would apply with any retirement income, including state pensions, wouldn’t it?

Indeed - so not sure why leaving it within the company is going to help the tax position? There's only going to be so much you can take out of the company (after you start drawing your state pension) before you are pushed into a higher rate tax bracket, so filtering some out now might make sense, rather than trying to further increase the numbers on the balance sheet. Could your wife's shareholding be increased so that she can have higher dividends, say, depending on her tax position?

It does sound as though a chat with a professional, rather than posting here and asking for suggestions based on virtually no knowledge of your overall position, could be one of your best investments.

gm0 said:

Another nuance to be aware of is that should you retire from revenue generating work for the limited and its activity tails off then the Ltd can cease being a "trading" company per its original articles/purpose and become an "investment" company simply by the fact that investment income from retained profits now is bigger than residual or zero trading income. 

If that happens the rules will shift on you a bit from what you are used to with the Ltd so far.

By far the simplest road is employer pension contributions to you as an employee these offset as a cost of the business with salary against revenues before profit and corp tax calculation.  But can't roll back time and reclaim CT from years ago for a pension decision now. 

Some land and other asset heavy generational family businesses use a SSAS pension for family members which is niche but can work well for some people.    Too much complexity and cost for a single director/small services limited vs just paying director and/or employees into a regular pension. 

Thank you, that's all really interesting, particularly the bit about the company changing when it stops trading. I hadn't given that a thought.
I don't really have a good argument as to why I haven't paid more company money into a pension, other than there were many years when the balance sheet was much less healthy, and I always struggled to force myself to pay into a pension when I could use the money to pay down mortgages instead. Also, and I know people will say this is nonsense, but I just find it more attractive to invest in a fund rather than my pension. Some things don't maske sense, its just your gut. 

Jaco70

Marcon said:

Jaco70 said:

150k was placed in an investment fund this year, as it was ‘spare’ funds, roughly 200k is bank balance and then somewhere between 50 and 80 in ‘stuff’, vehicles/stock etc.
I’m the director who runs the business and I own the shares (actually my wife owns 25%).

I totally understand that it’s not my cash, it’s the limited companies, and I wasn’t suggesting that tax only has to be paid once. The CT has been paid, but there will be income tax to pay when it’s taken out (that’s the main reason it’s been left in, because added to other income I have, the tax take makes it unattractive). But the tax issue would apply with any retirement income, including state pensions, wouldn’t it?

Indeed - so not sure why leaving it within the company is going to help the tax position? There's only going to be so much you can take out of the company (after you start drawing your state pension) before you are pushed into a higher rate tax bracket, so filtering some out now might make sense, rather than trying to further increase the numbers on the balance sheet. Could your wife's shareholding be increased so that she can have higher dividends, say, depending on her tax position?

It does sound as though a chat with a professional, rather than posting here and asking for suggestions based on virtually no knowledge of your overall position, could be one of your best investments.

Thanks. I have a very longstanding accountant (although he’s recently merged with a larger practice, so the dynamic is slightly different now) and an IFA who deals with my mortgages and now the investment fund, but I sometimes like to ask questions on here as well. Once. You often get some interesting advice.

I suppose I know higher rate tax is always going to be a possibility, impossible to avoid, but I just assume that when I stop trading (I do ok and enjoy it, but it’s hard work) my income will inevitably decline, and so then will be a better time to slowly withdraw any surplus money.

I’m in my early fifties, and hope to work a good while yet, but it’s only in fairly recent times that the equity in my properties and business have started to look more healthy, so these issues weren’t issues ten or fifteen years ago. Back then I just made a profit, took it out, paid the income tax. Covid was a profitable time for most people in construction, which was a huge shock to us all, and so many businesses have better balance sheets than ever before.

Marcon

Jaco70 said:

Marcon said:

Jaco70 said:

150k was placed in an investment fund this year, as it was ‘spare’ funds, roughly 200k is bank balance and then somewhere between 50 and 80 in ‘stuff’, vehicles/stock etc.
I’m the director who runs the business and I own the shares (actually my wife owns 25%).

I totally understand that it’s not my cash, it’s the limited companies, and I wasn’t suggesting that tax only has to be paid once. The CT has been paid, but there will be income tax to pay when it’s taken out (that’s the main reason it’s been left in, because added to other income I have, the tax take makes it unattractive). But the tax issue would apply with any retirement income, including state pensions, wouldn’t it?

Indeed - so not sure why leaving it within the company is going to help the tax position? There's only going to be so much you can take out of the company (after you start drawing your state pension) before you are pushed into a higher rate tax bracket, so filtering some out now might make sense, rather than trying to further increase the numbers on the balance sheet. Could your wife's shareholding be increased so that she can have higher dividends, say, depending on her tax position?

It does sound as though a chat with a professional, rather than posting here and asking for suggestions based on virtually no knowledge of your overall position, could be one of your best investments.

Thanks. I have a very longstanding accountant (although he’s recently merged with a larger practice, so the dynamic is slightly different now) and an IFA who deals with my mortgages and now the investment fund, but I sometimes like to ask questions on here as well. Once. You often get some interesting advice.

I suppose I know higher rate tax is always going to be a possibility, impossible to avoid, but I just assume that when I stop trading (I do ok and enjoy it, but it’s hard work) my income will inevitably decline, and so then will be a better time to slowly withdraw any surplus money.

I’m in my early fifties, and hope to work a good while yet, but it’s only in fairly recent times that the equity in my properties and business have started to look more healthy, so these issues weren’t issues ten or fifteen years ago. Back then I just made a profit, took it out, paid the income tax. Covid was a profitable time for most people in construction, which was a huge shock to us all, and so many businesses have better balance sheets than ever before.

The snag is that it might be 'interesting' but it is always based on an incomplete understanding of someone's situation. I think you would have received different answers (certainly from me!) had I known you were in your early 50s, and also the background to your business.

Jaco70 said:

I don't really have a good argument as to why I haven't paid more company money into a pension, other than there were many years when the balance sheet was much less healthy, and I always struggled to force myself to pay into a pension when I could use the money to pay down mortgages instead. Also, and I know people will say this is nonsense, but I just find it more attractive to invest in a fund rather than my pension. Some things don't maske sense, its just your gut. 

The bit about paying down mortgages is a perfectly good argument - many people feel as you do. What really doesn't make sense is your comment about preferring to invest in a fund rather than your pension. Pensions are invested in funds, and if you have a SIPP, you usually have a huge range of funds to choose from. Might be worth having a chat with your gut, perhaps...?

Kim1965

People who work in construction often go for btl and shy away from pensions. It does not make sense. 

Jaco70

Kim1965 said:

People who work in construction often go for btl and shy away from pensions. It does not make sense. 

I hear this often, but with respect it almost always stems from a fundamental misunderstanding of why many people (ie, me) get involved in BTL. When I bought my first BTL 25 years ago, there was no chin stroking about whether to invest my spare funds in property or pension, because there were zero spare funds. I scraped together a deposit on a terraced house, and that was all I had.

I, and many others, invested in BTL because it seemed like a way of building a pension with others (tenants) paying for it. To some degree it has worked out ok.

I knew even then that throwing 20k a year into a pension was a good idea, but I could only afford about £100 pm, which I did indeed invest in a pension. 

You shouldn’t assume that everyone has money to invest in a pension, and just chooses not to. I’ve put an extra 26k into my pension over the last three years, but this wasn’t an option a decade or so ago.